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A U.S. Supreme Court decision first viewed as a setback for patients seeking to sue their health insurance plans has come to mean different things to different people. A year after the decision, appellate courts are citing it to reach opposite conclusions in factually similar cases. Pegram v. Herdrich, 530 U.S. 211 (2000). Health insurers and patients’ lawyers are now looking to new cases to clarify when health plans can be sued under state malpractice laws for making decisions about plan benefits that allegedly hurt patients. Meanwhile, in Washington, Sens. Edward Kennedy, D-Mass., and John McCain, R-Ariz., both proponents of a “patients’ bill of rights,” want to codify a part of the Pegram decision that they, like some courts, believe actually benefits patients. “While Congress tries to pass a patients’ bill of rights, and while the Supreme Court waits to take up these cases, we’re left to follow the trail of bread crumbs left by Pegram,” says health care lawyer Stephen Ryan of Philadelphia’s Marshall, Dennehey, Warner, Coleman and Goggin. At the core of the confusion is the Employee Retirement Income Security Act, or ERISA. Passed in 1974, it aimed to protect pensions by making employers adhere to financial and fiduciary standards. The law also sought to make it easier for large multistate companies to run their benefits plans by granting exemptions from the myriad of state laws on benefits. Just before passing the bill, Congress added health care benefits to those covered by the pre-emption. That shut the door to most state court tort claims against the companies, leaving only the restrictive federal causes of action spelled out in ERISA. Health plans not covered by ERISA include Medicare, Medicaid, state and local government employee plans, insurance purchased by individuals and insurance purchased by groups such as churches and fraternal organizations. But that leaves 2.6 million employer-sponsored health plans covering 129 million workers and dependents as of 1999. THE CASE The Pegram case was originally brought by Cynthia Herdrich, a legal secretary from Bloomington, Ill., who was covered by the Carle Health Insurance Management Co. through her husband’s employer. Carle is a health maintenance organization (HMO) owned by its doctors. After Herdrich experienced pain in her abdomen, Dr. Lori Pegram, one of Carle’s physician-owners, ordered an ultrasound. But instead of doing it immediately at a local hospital, Pegram decided that Herdrich would have to wait eight days until it could be performed at a Carle-staffed facility more than 50 miles away. Herdrich’s appendix ruptured in the meantime. Herdrich sued Pegram and Carle in state court for medical malpractice and fraud. Herdrich prevailed on the malpractice claim, but Carle removed the fraud claims to federal court, where a judge found that ERISA pre-empted the state law claims. Herdrich amended her complaint to allege that ERISA provided a basis for the action, namely that Carle’s policy of financially rewarding physician-owners for limiting medical care was an inherent breach of an ERISA fiduciary duty. She argued that Carle had created an incentive for physicians to act in their own interest — not the plan participants’. The Supreme Court found that in delaying the test, Pegram had made both a medical judgment and an eligibility decision. The court held that, like pure eligibility decisions, so-called mixed decisions by HMO physicians are not fiduciary decisions under ERISA. As a result, the courthouse door closed somewhat firmly on Herdrich. Health plans viewed the decision as a major victory. Patients’ lawyers feared the insurance industry was building an impenetrable legal shield. But Pegram did not clarify the issues. True, it rejected the theory that ERISA provided the basis for a suit. But the court’s treatment of different kinds of health decisions raised the question of what the pre-emption from state law does and does not cover. With both of them citing Pegram, state and federal appeals courts in Pennsylvania a few weeks ago reached opposite conclusions concerning patients’ complaints of devastating medical delays. The state case was a victory in the Pennsylvania Supreme Court for plaintiff Basile Pappas. Pappas v. Asbel, 768 A.2d 1089 (2001). Pappas, a banquet waiter, was admitted in 1991 to Haverford Community Hospital complaining of paralysis and numbness in his extremities. The doctors concluded that an abscess was pressuring his spinal column and required immediate surgery. They attempted to transfer Pappas to a hospital that specialized in spinal cord injuries and could take him immediately. But the transfer was denied by Pappas’ health plan, U.S. Healthcare. The insurer, now part of Aetna, said that he could be sent to one of three other hospitals. He was transferred — but only after a four-hour delay — and he suffered permanent quadriplegia resulting from the spinal pressure. Pappas and his wife sued his primary physician, Dr. David Asbel, and Haverford Community Hospital, both of which settled. The insurers that paid the claim, Pennsylvania Hospital Insurance Co. (PHICO) and The Commonwealth of Pennsylvania Medical Professional Liability Catastrophe Fund (CAT Fund), in turn sued U.S. Healthcare to recover the damages. They alleged that the plan administrator should have known that the delay would be harmful. U.S. Healthcare sought to have the claims thrown out, using ERISA. The state high court held that there was no ERISA pre-emption. That made U.S. Healthcare subject to state negligence and malpractice laws for the administrator’s decision. In an opinion by Justice Ralph Cappy, the court cited the U.S. Supreme Court’s own language in a 1995 case, saying that “nothing in the language of [ERISA] or in the context of its passage indicated that Congress chose to displace general healthcare regulation, which historically has been a matter of local concern.” New York State Conference of Blue Cross & Blue Shield v. Travelers Insurance Company, 514 U.S. 645 (1995). U.S. Healthcare appealed to the U.S. Supreme Court, which last year remanded it to the state court to reconsider in light of Pegram. Justice Cappy concluded in the second Pappas decision, issued April 3, that the Travelers decision “instructs that ERISA does not pre-empt state law that regulates the provision of adequate medical treatment. Pegram instructs that an HMO’s mixed eligibility and treatment decision implicates a state law claim for medical malpractice, not an ERISA cause of action for fiduciary breach. Thus, if [the claim] arose out of a mixed decision, it is, according to Pegram, subject to state medical malpractice law.” Justice Cappy concluded that Pappas’ case grew out of a “mixed eligibility and treatment decision, the adverse consequences of which, if any, are properly redressed, as Pegram teaches, through state medical malpractice law. This law, as Travelers teaches, is not pre-empted by ERISA.” Just a week earlier, on March 27, the 3rd U.S. Circuit Court of Appeals viewed another delayed benefits claim in a very different light. A unanimous three-judge panel ruled that a delay in treatment was not a “mixed eligibility and treatment” decision, but an administrative decision that was completely pre-empted by ERISA. Pryzbowski v. U.S. Healthcare, 2001 U.S. App. Lexis 4903. In New Jersey, Linda Pryzbowski, a nurse, had undergone a series of back operations, and needed another one for pain. Her insurer, U.S. Healthcare, approved a consultation with a doctor outside its network. The doctor recommended the surgery in January 1994, but U.S. Healthcare did not approve it until June. After the operation, Pryzbowski continued to experience pain, which the out-of-network doctor blamed on the five-month delay. Pryzbowski sued U.S. Healthcare. Judge Dolores Sloviter wrote in a unanimous opinion for the three-judge panel that Pryzbowski’s “claims against U.S. Healthcare are limited to its delay in approving benefits, conduct falling squarely within administrative function. A holding that Pryzbowski’s claims against U.S. Healthcare are not completely pre-empted would open the door for legal challenges to core managed care practices which the Supreme Court eschewed in Pegram.” ADMINISTRATION AND MEDICINE Neither the Pappas nor the Pryzbowski nor the Pegram case questioned the quality of medical care, which is the basis for most state law malpractice suits. Instead, the plaintiffs complained of administrative delay in providing benefits to which they were entitled. The problem with the Pegram decision is that it involved liability for a doctor’s decision that fell between a treatment and a benefits decision. The health care industry and patient advocates are still waiting for a case that will determine if a decision by a health plan administrator, not a doctor, can ever rise to the level of malpractice subject to state malpractice laws and not be pre-empted by ERISA. The parties in Pryzbowski do not intend to appeal to the Supreme Court, say legal sources familiar with the case. Officials at U.S. Healthcare, which is involved in both cases, did not return repeated phone calls seeking comment. But sources outside the company say that U.S. Healthcare plans to file a petition for review with the Supreme Court in the Pappas case before the July 3 deadline. Lawyers on both sides of the issue say Pappas v. Asbel could be the case everyone is waiting for. “ Pegram did not address pre-emption; it addressed fiduciary decisions,” says Lou Saccoccio, general counsel for the American Association of Health Plans. “The Supreme Court will have to take a case that addresses the problem. It will have to be a case in which the plan makes a coverage decision, not the doctor.” “ Pegram only answered whether doctors are fiduciaries, nothing more,” says Mary Ellen Signorille, staff attorney for the AARP Foundation Litigation, which advocates for patients. “The Supreme Court said physicians are not fiduciaries. But the rest of the decision gave plaintiffs ammunition to go to state court, and HMOs ammunition to go federal court.” That’s why Ryan, the Philadelphia attorney for PHICO and the CAT Fund, the insurers which are trying to recover damages in the Pappas case, says the Supreme Court’s “trail of bread crumbs” in Pegram is not enough to settle the question of health plan liability. Ryan noted that individuals who purchase health insurance on their own rather than through an employer have been successful in recovering damages in state courts for harmful decisions by health plan administrators, not just doctors. The California Supreme Court on May 9 ruled that Medicare patients enrolled in an HMO can sue those health plans under state tort laws for administrative decisions. But because the majority of Americans are covered through their private employer or a relative’s employer, their health plans are shielded from that same liability through ERISA. “Did Congress intend to create a second class of citizens of all these employees who don’t have the same rights?” Ryan asks. Along with the Pappas case, the Supreme Court will face appeals in two other ERISA pre-emption cases. The cases do not involve malpractice claims. Instead, they present conflicting rulings on the question of whether states can set up independent panels — designed to make quick decisions for critically ill patients who cannot wait for court proceedings — to review decisions by ERISA-covered health plans. States passing health insurance laws “are now the biggest challenge” to the health plans, says Lonie Hassel, a partner in the Groom Law Group of Washington who represents insurance companies and employer sponsors of health plans. The laws “nibble on the edge of ERISA” by requiring specific treatments and an appeals process, she says. Corporate Health Insurance Inc. v. Texas Department of Insurance, No. 00-6665 (5th Cir.) and Moran v. Rush Prudential HMO Inc., No. 00-1021 (7th Cir.). While the Pegram decision was initially considered a win for the HMO industry, health care advocates saw a window of opportunity. IN CONGRESS Sen. Kennedy, who has for several years pursued “patients’ bill of rights” legislation to regulate the practices of HMOs and to remove their ERISA legal shield, changed his and Sen. McCain’s bill to codify part of the Pegram decision. It would allow patients to sue health plans in state court for medical decisions. “The Pegram decision provided the crucial justification for the bifurcated legal process in the Kennedy-McCain plan,” says Kennedy spokesman Jim Manley. Opponents say that the Kennedy-McCain bill goes beyond codifying Pegram. “Kennedy and McCain claim it codifies Pegram. But instead it just creates new causes of action against the administration of health plans,” says Saccoccio of the American Association of Health Plans. “ Pegram deals with physicians, not the administration of the plan.” “The Kennedy bill is not a codification of Pegram, but a complete misinterpretation of the verdict,” says a Senate Republican aide. “They are using it to justify a dramatic change in public policy.” An undercurrent in many of the court decisions is a plea to Congress to address the changed health care marketplace with a modernized ERISA statute. Judge Sloviter wrote in Pryzbowski, “It is for Congress and not the courts to decide whether it is sound policy for our health care system to limit or channel the relief available or whether ERISA should allow for broader remedies for beneficiaries in the world of managed care.” The AARP’s Signorille says that the Supreme Court in its narrowly written Pegram decision was telling Congress, “We’re not going to decide these hard issues. This is your area, and we’re not going to be an activist court by addressing it.”

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