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The Supreme Court’s June 12 Pegram v. Herdrich decision has been widely touted as a victory for health maintenance organizations that had feared an avalanche of lawsuits if the Court had ruled for the plaintiff. The Pegram decision, though, may actually harm HMOs. This will happen if courts rely on it to interpret narrowly the clauses in the Employee Retirement Income Security Act that until now have pre-empted state laws subjecting HMOs to liability for medical malpractice. Already, one federal court has cited Pegram to find ERISA did not pre-empt Texas state law. In Pegram, Cynthia Herdrich sued her physician, a related physician-owned medical group, and her health plan in an Illinois state court. She alleged fraud and other torts based on the physician’s failure to order an immediate ultrasound. Before Herdrich had the ultrasound that had been scheduled eight days later at a clinic 50 miles away, her appendix burst. The defendants removed the case to federal court, claiming that ERISA pre-empted the state lawsuit. In federal court, Herdrich alleged that the defendants had breached ERISA’s fiduciary duties because they used an incentive arrangement that rewarded HMO physicians for using affiliated facilities, such as the clinic where her ultrasound was scheduled. The District Court dismissed the claim, but the 7th Circuit reinstated it. The Supreme Court reversed, reasoning that any contrary holding would lead to replicating state malpractice law within the federal ERISA scheme. PRE-EMPTED STATE LAW Why does Pegram potentially limit ERISA’s ability to pre-empt state law? When Congress enacted ERISA in 1974, it included two provisions to make clear that ERISA pre-empted certain state statutory and common laws. Section 502(a), known as the “complete pre-emption” clause, prohibits any state-law claims relating to benefit denials. Section 514(a) provides that, with only a few exceptions, ERISA’s provisions supersede any and all state common laws insofar as they “relate to” an employee benefit plan. HMOs have long relied on these ERISA pre-emption clauses to protect themselves from state lawsuits in which patients allege that the HMOs provided them with substandard medical care. In the 1980s and early 1990s, the Supreme Court interpreted these pre-emptive provisions quite broadly, holding that ERISA pre-empted state claims whenever they were related to, referred to, or connected with an ERISA benefit plan. But, beginning in 1995, the Court began to narrow ERISA pre-emption in the health care field, stating that Congress had not intended ERISA to pre-empt traditional state regulation. That year, in New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Insurance Co., the Court held that ERISA did not pre-empt a New York state statute requiring hospitals to collect surcharges from patients covered by commercial insurers other than Blue Cross/Blue Shield. Describing that decision in its Pegram opinion, the Court stated that it “thr[e]w some cold water on the preemption theory” in the health care field by rejecting the insurers’ argument. Because health care has traditionally been regulated by the states, according to the Court, it needed to look “to the scope of the state law that Congress understood would survive.” The Court similarly refused to interpret ERISA to pre-empt a state-based claim in its 1997 decision of De Buono v. NYSA-ILA Medical & Clinical Services Fund. QUALITY VS. QUANTITY Lower courts, struggling to follow the Supreme Court precedents narrowing pre-emption in the health care field, began to distinguish between “quality” and “quantity” of claims against HMOs. Quality claims are not pre-empted because they focus on actual medical treatment, whereas the quantity claims alleging that treatment was denied are pre-empted because they relate to the underlying ERISA plans. For example, in the 3rd Circuit’s 1999 In re U.S. Healthcare Inc., the plaintiffs, seeking to recover for the death of their infant daughter, alleged that the HMO-defendant acted negligently in adopting policies that encouraged its participating physicians to discharge newborn infants within 24 hours of birth, discouraged physicians from readmitting infants to the hospital, and failed to provide in-home nursing visits. The HMO attempted a pre-emption argument, but the court held that because the claims addressed the quality, not quantity, of care, they could proceed. The 3rd Circuit handed down a similar holding in its 1995 opinion in Dukes v. U.S. Healthcare Inc. Pegram implicitly rejected this dichotomy between quality and quantity. Although the parties to the case did not ask the Court to rule on pre-emption, the opinion nonetheless explained that any decision by an HMO necessarily implicates both quality (“treatment”) and quantity (“eligibility”). Thus, a ruling for plaintiff “would raise a puzzling issue of pre-emption” because a “federal fiduciary law applying a malpractice standard would seem to be a prescription for pre-emption of state malpractice law, since the new ERISA cause of action would cover the subject of a state-law malpractice claim.” This explanation suggests that the Court believes that HMO malpractice claims are not now pre-empted by ERISA. If true, this means that Pegram protects HMOs from ERISA liability, but it narrows the protective scope of ERISA pre-emption. That is, though Pegram blocks federal ERISA claims, it may clear the way for more state suits to proceed. POST-’PEGRAM’ Eight days after the Court decided Pegram, the 5th Circuit cited the decision to support its holding denying an ERISA pre-emption argument. In In Corporate Health Insurance Inc. v. Texas Department of Insurance, the appellate court ruled against HMOs and other insurers who challenged recently enacted Texas legislation. The new law let plaintiffs sue HMOs that failed to meet an ordinary-care standard or failed to disclose physician incentives. The law also included anti-retaliation and anti-indemnification provisions that protected HMOs from penalizing physicians. Texas HMOs brought an action arguing that ERISA should pre-empt the state law because claims under it would “inevitably question the provider’s determinations of coverage under an ERISA plan.” The court rejected defendants’ reasoning on the standard-of-care provisions because it was “not persuaded that Congress intended for ERISA to supplant this state regulation.” The court also held that the anti-retaliation and anti-indemnification provisions were outside ERISA’s pre-emptive reach. As the court stated in a footnote, “The Supreme Court’s most recent discussion of ERISA [in Pegram] confirms this analysis. . . . Part of the Court’s reasoning was that states are currently allowed to impose malpractice liability on HMOs for such action.” This interpretation, if adopted by other circuits, exposes HMOs to greater state regulation and resulting litigation. And the states are passing such legislation. Missouri and Georgia, for example, have enacted legislation addressing HMO quality of care. And Arizona, California, Maine, and Maryland have enacted legislation regarding disclosure of physician incentive programs. If courts hold these, and other, state laws to stand in the face of ERISA, HMOs may come to view Pegram as far less than a total victory. Susan L. Burke, special counsel at Covington & Burling, specializes in health care litigation. She previously litigated health care fraud cases for the Department of Justice. She can be reached at mailto:[email protected] .

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