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Consumers who claim damages based on poor medical care provided through a health maintenance organization may sue their HMOs in state court, a panel of the 5th Circuit has ruled. But the court also limited claims that are based on an HMO’s cost-containment system. The suit, Corporate Health Insurance Inc. and Aetna Health Plans of Texas Inc. v. Texas Department of Insurance, challenged the state’s right to regulate managed health care. Aetna claimed that the 1997 state act that created a new cause of action against managed care entities was pre-empted by the general pre-emption clause in the Employee Retirement Income Security Act (ERISA). Judge Patrick Higginbotham agreed with the state’s interpretation as it relates to liability based on quality of care, but he distinguished between that type of case and a case based on denial of coverage for a medical procedure. “When the liability provisions are read together, they impose liability for a limited universe of events,” he wrote in the court’s opinion. “The provisions do not encompass claims based on a managed care entity’s denial of coverage for a medical service recommended by the treating physician: that dispute is one over coverage, specifically excluded by the Act. Rather, the Act would allow suit for claims that a treating physician was negligent in delivering medical services, and it imposes vicarious liability on managed care entities for that negligence.” He wrote that a medical malpractice suit against a doctor is not pre-empted simply because the medical services were arranged by an HMO and paid for by an ERISA plan. Likewise, the vicarious liability of the HMO for whom the doctor acted as an agency is rooted in general principles of state agency law, he wrote. In a prepared statement, Aetna hailed the 5th Circuit’s decision. “The decision strongly confirms federal pre-emption of all state law claims for benefit administration decisions and coverage disputes,” the statement says. “Specifically, the court held that the Act applies only to malpractice of a treating physician, but not coverage disputes with a managed care entity,” it continues. Andrews & Kurth partner John Shely, outside counsel to Aetna, agrees. “The heart of the matter is and remains that managed care entities cannot be held liable under state law for coverage disputes, even when a service has been recommended by a patient’s treating physician,” he says. ‘A Good Balance’ The 5th Circuit opinion came one week after the U.S. Supreme Court ruled in Pegram v. Herdrich that consumers could not sue HMOs in federal court on the basis of the organization’s financial incentives to doctors. Elizabeth Rogers, a partner in Vinson & Elkins in Austin, sees the 5th Circuit ruling as adding another brick in the foundation of health care law. Pegram and the 5th Circuit case “strike a good balance for our health care system,” she says. “HMOs can no longer be forced to make wholesale changes to their cost containment programs.” “The 5th Circuit says a plaintiff’s complaint should fall on deaf ears in a court if it is founded on the structure of an HMO’s cost-containment mechanisms. The Supreme Court says the debate over the structure should be up to state legislatures,” says Rogers, who works in health care law but was not involved in the 5th Circuit case. George Parker Young, who has worked pro bono on the case as a special counsel to the Texas attorney general, says that HMOs may not be seeing a pure victory in the part of the ruling that limits claims based on cost containment. “If HMOs pay improper financial incentives that result in bad outcomes, they still can be held liable,” he says, predicting that HMOs probably will re-evaluate their cost-containment policies and see if those polices need to be revised, in light of a close reading of the 5th Circuit’s decision. The 5th Circuit’s opinion also found that the state legislation allowing for independent review of managed care organizations’ “adverse determinations” falls under ERISA’s pre-emptive reach. “It is apparent that �adverse determinations’ include determinations by managed care entities as to coverage, not just negligent decisions by a physician. The provisions allow a patient who has been denied coverage to appeal to an outside organization. Such an attempt to impose a state administrative regime governing coverage determinations is squarely within the ambit of ERISA’s preemptive reach,” Higginbotham wrote. “The only unfortunate or disappointing part of the decision is the striking down of the IRO,” the independent review clause, says Young, a name partner in Friedman, Young & Suder of Fort Worth. “Independent review has been finding the HMOs wrong half the time, which is frightening,” he said. The Aetna statement, however, said the company will voluntarily continue to comply with the Texas independent review process. Young, who praises the attorney general and his staff for their work on the case, predicts that the HMO liability will become an important election issue.

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