Law & Psychiatry: Overcoming ERISA as a Barrier to Managed Care Organizations' Liability for Utilization Review Decisions

In 1994 Pamela Danca sought permission from her insurance company to be treated for mental illness at McLean Hospital in Massachusetts. Her physician recommended treatment at McLean because Ms. Danca had been treated there previously. However, the insurer's utilization review denied permission and directed her to another hospital. Treatment was unsuccessful, and Ms. Danca eventually attempted suicide by self-immolation, causing permanent disfigurement. She brought a lawsuit in state court against the insurer and the hospital, alleging that the utilization review decision in her case constituted malpractice. The courts, however, dismissed her claim because of complex provisions of the Employee Retirement Income Security Act (ERISA). The federal court of appeals acknowledged that this outcome meant "that no significant remedy exists" for individuals injured by the negligence of utilization review firms (1).

Despite calls for reform of ERISA to permit the recovery of damages in such circumstances, no remedy has been available (2). However, a recent decision by the U.S. Court of Appeals for the Second Circuit may augur a change that, unless reversed on appeal, will provide redress when individuals are denied access to care on the basis of utilization review decisions (3). In this column I describe the ERISA provisions and previous court decisions that have effectively barred individuals from recovering damages, and I discuss the appeals court decision and its implications.

ERISA's provisions

Since its enactment in 1974, ERISA has stood as a virtually impenetrable barrier to successful litigation against the administrators of health and behavioral health benefit plans that meet its criteria. Congress enacted ERISA to provide greater protection for employee benefits, including health benefits. ERISA creates fiduciary duties for employers administering employee benefits in ERISA-qualified plans—which include most major health-benefit plans in the United States. In exchange for agreeing to increased statutory protection for employees, employers who use such plans receive tax benefits and some exemptions from state regulation. Congress intended to create a national standard for the regulation of such benefits, recognizing that otherwise the employers who provide most health insurance in the United States would be subject to the unpredictability of piecemeal regulation by the states. As part of the effort to achieve national standards, Congress provided that ERISA would "preempt"—that is, override—state laws that conflict with ERISA.

Effects on federal and state court cases

Historically, the federal courts have taken preemption to mean that lawsuits against the administrators of ERISA-qualified health plans could be brought only in federal court. In addition, the U.S. Supreme Court has ruled that compensatory and punitive damages, which are available in state malpractice claims, are not available in federal litigation under ERISA (4). The practical result has been that financial incentives for bringing malpractice claims in state court—large damage awards for the plaintiff and large fees for the plaintiff's lawyer—do not extend to federal lawsuits involving ERISA. As a result, claims against managed care plans for denying benefits have been infrequent and seldom successful.

In recent years, the courts have begun to permit claims alleging improper care to proceed in state courts against ERISA plans when the health or behavioral health plan directly provides or arranges for the provision of care—for example, when the claim is against a physician-owned health maintenance organization (5). The courts have also upheld the legality of state legislation that permits such claims (6). However, courts have ruled that claims alleging injury from decisions made in administering a plan, including determinations of medical necessity made as part of a utilization review, had to be brought in federal court. Such rulings were due to a belief that permitting state courts to hear such claims would violate congressional intent to create a national standard for regulating ERISA plans.

Cicio v. Does

The recent decision by the U.S. Court of Appeals for the Second Circuit in Cicio v. Does suggests a fundamental change in this approach. In that case, the treating physician sought approval from Vytra Healthcare for a double stem-cell transplant, among other types of treatment, for the patient's multiple myeloma. According to a definition cited by the court, stem cell transplants involve removing blood from a donor—in this case, the patient—separating the peripheral stem cells, reinfusing the remaining blood into the donor, and infusing the stored stem cells into the patient after high-dose chemotherapy. The double procedure recommended by the physician involves a second reinfusion of stem cells several months after the first. The physician argued that this technique had been proved effective and that a double transplant improved rates of recovery. Vytra's medical director eventually approved a single transplant only. However, by the time Vytra approved even the limited treatment, the patient's condition had progressed to the point that he was no longer a candidate for a transplant. He died shortly thereafter.

The patient's spouse filed a lawsuit in state court in New York, alleging among other things that Vytra had committed medical malpractice in denying the recommended course of treatment. The defendant removed the case to federal court on the grounds that the lawsuit sought to enforce the terms of a benefit plan covered by ERISA and that the state courts therefore could not appropriately exercise jurisdiction. The federal trial court ruled that Ms. Cicio was challenging a "quasi-medical/administrative decision" of the type controlled by ERISA and that therefore the case could not be brought as a malpractice case in state court. In the district court's view, all Ms. Cicio's claims involved administrative decisions about eligibility for certain benefits and therefore had to be heard in federal court, with the limitations on damages described above.

The federal court of appeals reversed the decision two to one, ruling that a jury could properly find that the medical director's letter denying coverage for the proposed treatment "embodied a medical decision" and appeared "to reflect a decision about an appropriate level of care." The court noted a letter from the physician who conducted the utilization review in which he "at least seems to have been engaged in a patient-specific prescription of an appropriate treatment, and, ultimately, a medical decision that a single stem-cell transplant was the appropriate treatment for Mr. Cicio." In the court's view, such decisions could implicate state law duties concerning the quality of medical care, not simply federal laws on the administration of benefits.

The court of appeals then had to consider whether such a claim could remain in state court or whether ERISA provisions meant that the claim had to be pursued in federal court. In a significant decision, the majority ruled that allegations that the medical director's denial of care constituted malpractice could be brought in state court. The court reiterated its view that prospective utilization review was at its core, at least in part, a medical decision. The court of appeals, relying partly on a recent Supreme Court decision on ERISA in which the Court had observed that there might be considerable overlap between some types of eligibility decisions and treatment decisions (7), ruled that the case should be returned to state court to determine whether the medical director's decision was a medical or purely an eligibility decision. If it was determined to be an eligibility decision—that is, if the medical director had made the decision on the grounds that the proposed treatment was experimental and therefore was excluded automatically from coverage—the case would be dismissed. If the decision was determined to be medical, the case could proceed as a malpractice claim in state court.

A dissent argued that the core issue was the denial of most types of damages in ERISA claims brought in federal court and that it was for Congress to provide a remedy, not the federal courts in individual cases.

Implications for lawsuits against health plans

The Cicio decision is one of the first to hold explicitly that prospective utilization review decisions may be characterized as medical. Cicio is not the only decision to do so. For example, an Arizona appellate court has upheld the exercise of jurisdiction by the state Board of Medical Examiners over a physician serving as medical director for Blue Cross, characterizing the decisions he makes for Blue Cross as medical (8). At the same time, other courts have characterized such decisions as administrative. Therefore, no consensus exists in the courts about the nature of prospective utilization review.

If Cicio is not appealed and reversed by the Supreme Court, it should have a significant impact on litigation against managed care organizations. In ruling that decisions about medical necessity may be challenged through malpractice litigation, the appeals court has opened up for scrutiny an area of practice that has been left largely to the discretion of the administrators of benefit plans. As the dissent suggests, the ultimate resolution of the many disputes about the meaning and application of ERISA rests with Congress.

In the interim, the Cicio decision represents an important milestone in recalibrating the relationship between the administrators of health benefit plans and the beneficiaries of those plans. The decision also provides plan beneficiaries with a means of challenging determinations of medical necessity that until now has been unavailable. Therefore, the Cicio decision represents one of the most significant legal challenges to third-party reviews of medical necessity since the beginning of the era of managed care.

Dr. Petrila is professor and chair of the department of mental health law and policy at Louis de la Parte Florida Mental Health Institute, University of South Florida, MHC 2738, Tampa, Florida 33617 (e-mail, [email protected]). Paul S. Appelbaum, M.D., is editor of this column.