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:: Hospital State Law Claims Against Aetna HMO & PPO Plans Remanded To State Court

Because of plaintiff’s managed care contracts with the defendants, plaintiff has the right to assert independent causes of action regardless of its status as an assignee. Put another way, the mere fact of an assignment does not result in complete preemption of the plaintiff’s claim if it asserts a cause of action outside its right to recover as an assignee. Memorial Hermann Hosp. System v. Aetna Health Inc, Slip Copy, 2007 WL 1701901 (S.D.Tex.) (June 11, 2007)

The recent case, Memorial Hermann Hosp. System v. Aetna Health Inc., represents an interesting trend in provider reimbursement cases against ERISA plans. That a provider takes an assignment of benefits as a routine business practice does not necessarily limit the provider’s remedies to those available under ERISA.

The case developed in this way:

The Managed Care Agreements

The hospital entered into managed care contracts with the defendants’ ERISA-governed HMO and PPO plans. Each insured assigned his or her right to receive benefits under the managed care plan to the hospital.

The Allegations

The hospital alleged that the defendants delayed payment through claims “investigations” which were, in fact, a subterfuge, and generally did not pay the amounts due under the agreements in a timely manner. The hospital filed suit in Texas state court seeking $1.2 million alleged due in fees plus 18% interest, a statutory penalty under the Texas Insurance Code for failure to pay claims in a timely manner, and attorneys’ fees for prosecuting this action.

Removal and Motion To Remand

The defendants removed the case to federal court on the basis of ERISA preemption of the plaintiff’s claims. The case came before the district court for decision on a motion by the plaintiff to remand the action to state court.

Preemption Analysis

Very important to the holding, the district court reviewed the basic requirements for complete preemption, stating:

In this case, at least one of the plaintiff’s claims must be completely preempted by ERISA § 502(a), 29 U.S.C. § 1132(a), for this court to have subject-matter jurisdiction over the action. See Davila, 542 U.S. at 207.

Under Davila’s complete preemption analysis, federal question jurisdiction is present only if:

(1) Memorial Hermann could have brought its state-law claims under section 502(a), and

(2) “where there is no other independent legal duty that is implicated by a defendant’s actions.”

(“Conflict preemption”, the court noted, would not suffice to create federal subject matter jurisdiction. For more of this concept, see the note commentary below.)

Thus, the test for preemption has two prongs – a “standing” test and an “independent legal duty” test.

#1 The Standing Test

Since healthcare providers are not considered “beneficiaries” or “participants” under ERISA, they lack standing to directly assert claims for benefits against ERISA plans under 29 U.S.C. § 1132(a). On the other hand, a proper assignment of benefits by a plan participant to a provider may constitute sufficient derivative standing to permit the provider to advance claims under ERISA.

Proceeding to the complete preemption analysis, the court concluded that the hospital could have pursued remedies under ERISA as an assignee. That might not be apparent at first blush since Section 1132 limits standing as follows:

[a] civil action may be brought-(1) by a participant or beneficiary-… (B) to recover benefits due to him under the terms of his plan, to enforce his rights under the terms of the plan, or to clarify his rights to future benefits under the terms of the plan.

The statute must be read with a judicial gloss in mind, however, since, in the Fifth Circuit, a hospital has standing to sue under § 1132(a)(1)(B) as an assignee of a participant or beneficiary in order to claim plan benefits.

Thus:

Plaintiff had an assignment of benefits from defendants’ patients and could sue under § 1132(a) as an assignee. Minimizing its right to bring its claim under § 1132 as an assignee, however, plaintiff repeatedly states that it only presses claims for violations of legal duties independent of ERISA. The court agrees with the plaintiff.

(citations omitted)

The district court agreed with the plaintiff. The court viewed the hospital’s claims as an assignee as conferring a right, not an obligation, stating:

Because of plaintiff’s managed care contracts with the defendants, plaintiff has the right to assert independent causes of action regardless of its status as an assignee. Put another way, the mere fact of an assignment does not result in complete preemption of the plaintiff’s claim if it asserts a cause of action outside its right to recover as an assignee.

The court did not have to make a determinative ruling on this issue, since the test is conjunctive: “Moreover, assuming that the court determined plaintiff has standing to assert its claims under § 1132(a), complete preemption under ERISA requires both standing and the lack of an independent legal duty supporting a state-law claim.”

#2 The “Independent Legal Duty” Test

Taking up the issues under the second prong of the complete preemption analysis, the district court summed up this aspect of the test as follows:

A legal duty is not independent if it “derives entirely from the particular rights and obligations established by [ERISA] benefit plans.”

And so the question for each claim becomes, is the claim derivative or independent?

1. The Breach of Contract and Related Texas Insurance Code Claims

a. Breach of Contract Claims

The court held that the dispute was essentially over the amount of payment, which stemmed from the managed care contracts, not the right to payment, which stem from the assignments. The plaintiff’s common-law breach of contract claim was therefore not completely preempted under a Davila analysis.

b. Texas Insurance Code

The court noted that the plaintiff’s claims that defendants violated Texas’s prompt pay statutes did not seek to enforce rights protected by ERISA’s civil enforcement provision. On the contrary, in the court’s view, Texas passed these statutes to ensure prompt payment of claims by insurers to independent health care providers-not to ERISA plan participants. Thus, while the ERISA plans may provide the factual context for these claims, the plans were “peripheral to the statutory obligation to pay plaintiff promptly for services rendered”, and the statutory prompt pay claims thereby escaped preemption.

2. Other Texas Insurance Code Claims and DTPA Claims

Nor would the court find that alleged misrepresentation claims in the context of deceptive insurance practices raised any rights to plan benefits, stating:

Although plaintiff does not specifically reference which statements constituted misrepresentations, they appear to be limited to statements about payment of allegedly overdue invoices. These allegations are unrelated to an assignment of benefits, do not raise any rights to Plan benefits, and do not allege bad faith processing of the invoice. Accordingly, these causes of action do not derive entirely from legal duties created by ERISA and are not completely preempted . . .

3. Negligence/Intentional Tort Claims

The plaintiff also alleged that the defendants “acted intentionally or negligently” in “failing to pay the claims on a timely basis”, “intentionally misleading Plaintiff about payment expectations under the contract”, and among other things “wrongfully recouping payments previously made on authorized and certified admissions by withholding payment on ‘other’ members uncontested claims”.

These claims raised an issue of conflict preemption in the view of the court. As such, they could not form the basis of federal court jurisdiction. Thus, the case was remanded to state court:

Because none of plaintiff’s claims is completely preempted, this court has no jurisdiction to determine whether the negligence/intentional tort claims “relate to” ERISA plans and are subject to conflict preemption under § 1144(a). In fact, for the court to make any statement or finding regarding conflict preemption in this action would be tantamount to an advisory opinion, which is strictly prohibited by the Constitution. See U.S. Const. art. III, § 2, cl. 1 (limiting the court’s federal question jurisdiction to cases and controversies arising under federal law). Thus, this court expressly declines to issue any opinion on the conflict preemption issues remaining in this action, appropriately and necessarily leaving the resolution of these issues to the state tribunal.

Note: AETNA Health, Inc. V. Davila 542 U.S. 200 (2004) was actually a case in which the plaintiff’s claims were preempted -

A benefit determination under ERISA is part and parcel of the ordinary fiduciary responsibilities connected to the administration of a plan. State law claims against health maintenance organizations (HMOs) based upon refusal to cover certain medical services in violation of Texas Health Care Liability Act are preempted.

- but the Supreme Court analysis in that case has provided an outline used in many subsequent decisions to find that provider claims are not preempted. See, e.g., Participant Benefit Assignments Do Not Foreclose Hospital’s State Law Claims Against Health Plan

Additional Considerations - The trend permitting state law provider reimbursement claims in the managed care context is outlined by the following cases: Pryzbowski v. U.S. Healthcare, Inc., 245 F.3d 266, 277 (3d Cir.2001); Pascack Valley Hosp., Inc. v. Local 464A UFCW Welfare Reimbursement Plan, 388 F.3d 393, 400 (3d Cir.2004).

The district court’s decision goes beyond Pascack, however, since the Third Circuit did not address derivative standing:

The parties dispute whether, under the law of this [Third] Circuit, the Hospital can obtain standing under § 502(a) by virtue of an assignment of a claim from a participant or beneficiary. We need not resolve this *401 dispute, however, because there is nothing in the record indicating that Psaras and Rovetto did, in fact, assign any claims to the Hospital.

Whether derivative standing based upon assignments is an elective status for health care providers has not been definitively settled, but supporting the district court’s position are:

  • Abilene Regional Medical Center v. United Indus. Workers Health and Benefits Plan, Slip Copy, 2007 WL 715247 C.A.5 (Tex.) (March 06, 2007) (“It is true that ERISA does not preempt a state law claim simply because a hospital could sue as an assignee.”) (citing, Blue Cross of Cal. v. Anesthesia Care Assocs. Med. Group, Inc., 187 F.3d 1045, 1050 (9th Cir.1999)
  • Tenet Healthsystem Hosps., Inc. v. Crosby Tugs, Inc., No. Civ.A. 04-1632, 2005 WL 1038072 n. 3 (E.D.La. Apr.27, 2005) (“That [plaintiff] may, in fact, have an assignment, is not itself dispositive, if the rights at issue are those provided by a third-party agreement, rather than an ERISA plan.”) and
  • Children’s Hosp. Corp. v. Kindercare Learning Ctr., Inc., 360 F.Supp.2d 202, 206 (D.Mass.2005) (“As a master of its own complaint, [plaintiff] had the right to assert independent causes of action regardless of the assignment.”).

State Law Preemption Cases Distinguished - The district court distinguished other Fifth Circuit preemption cases as follows:

Several Fifth Circuit opinions address preemption of similar state-law tort claims and other claims asserted by health care providers in cases removed from state court.

See Transnational Hosp. Corp. v. Blue Cross & Blue Shield of Tex., 164 F.3d 952, 954-55 (5th Cir.1999) (holding that hospital’s state-law claims for breach of fiduciary duty, negligence, equitable estoppel, breach of contract, and fraud based on the improper processing of benefits are preempted by ERISA); Cypress Fairbanks Med. Ctr. v. Pan-Am. Life Ins. Co., 110 F.3d 280, 282 (5th Cir.1997); Memorial Hosp. Sys. v. Northbrook Life Ins. Co., 904 F.2d 236, 243-44 (5th Cir.1990).

Defendants rely on these cases to support their contention that at the very least plaintiff’s claim for negligent claims processing is completely preempted by ERISA. (“[U]nder controlling Fifth Circuit precedent, MHHS’s claims for negligent claims processing are completely preempted by ERISA as a matter of law.”). However, all of the cases cited by the defendants rely on conflict preemption analysis under 29 U.S.C. § 1144(a), rather than complete preemption under § 1132(a)(1)(B) and were decided before the Supreme Court’s decision in Davila. As stated previously, conflict preemption is a defense to a state claim and does not create subject-matter jurisdiction for cases filed in federal court or removed from state court. See, e.g., Giles, 172 F.3d at 337; Copling v. Container Store, Inc., 174 F.3d 590, 594-95 (5th Cir.1999), rev’d on other grounds, Arana v. Ochsner Health Plan, 338 F.3d 433 (5th Cir.2003) (en banc).

Complete Preemption Contrasted With Conflict Preemption - The district court’s distinction between complete and conflict preemption derives from AETNA Health, Inc. V. Davila 542 U.S. 200 (2004).

- Complete preemption arises under the section 502 civil-enforcement provisions of ERISA when a state-law cause of action duplicates, supplements, or supplants one of the remedies provided in that section. See Aetna Health Inc. v.. Davila, 542 U.S. 200, 207-08, 124 S.Ct. 2488, 2495 (2004). If an individual, at some point in time, could have brought his claim under ERISA § 502, and where there is no other independent legal duty that is implicated by a defendant’s actions, then the individual’s cause of action is completely pre-empted by ERISA Section 502. See Davila, 542 U.S. at 210. In the case of complete preemption, a claim which comes within the scope of ERISA Section 502, even if pleaded in terms of state law, “is in reality based on federal law.” Complete preemption permits removal to federal court because the cause of action “arises under” federal law.

- Express or “conflict” preemption, arises when state-law claims are asserted that “relate to any employee benefit plan described in section 1003(a) of this title and are not exempt under section 1003(b) of this title.” 29 U.S.C. § 1144(a). A state-law claim may “relate to” a benefit plan even if the state law is not specifically designed to affect such plans and the effect is only indirect. Once the defense of conflict preemption is raised, § 1144(a) “governs the law that will apply to the state-law claims, regardless of whether the case is brought in state or federal court.” Conflict preemption is insufficient to produce federal removal jurisdiction.

Post-Service Versus Pre-Service Claims - In the context of a negotiated payment after the provider rendered services, the Fifth Circuit has held the provider’s claims were preempted:

ARMC [the provider] argues that ERISA does not preempt its breach of contract claim because it is suing as an independent third-party provider, and not as an assignee asserting a derivative claim for benefits. ARMC points to cases such as Pasack Valley Hospital, Inc. v. Local 464A UFCW Welfare Reimbursement Plan, 388 F.3d 393 (3d Cir.2004), and Rogers v. CIGNA Healthcare of Texas, 227 F.Supp.2d 652 (W.D.Tex.2001), to support the proposition that ERISA does not preempt breach of contract claims by third-party health care providers. Abilene Regional Medical Center v. United Indus. Workers Health and Benefits Plan, Slip Copy, 2007 WL 715247 C.A.5 (Tex.) (March 06, 2007)

Managed Care Contract Language - As yet, no case has addressed the specific language of the managed care contracts which could conceivably address the status of the provider with respect to claims. Another chapter in this saga may unfold as the managed care companies react to the erosion of preemption by changing the terms of their contracts. This appears to be a viable alternative and warrants vigilance by the provider community as to their contractual rights. Cf., :: Assignments and Contractual Agreements Form Basis For Differing Preemption Outcomes

Conflict Preemption Still Viable Defense - Though the district court held that all of the cases cited by the defendants relied on conflict preemption analysis under 29 U.S.C. § 1144(a), and that conflict preemption did not create federal subject matter jurisdiction, that holding does not end the preemption issue for the plaintiff. In fact, the district court itself began its opinion with the observation that:

Once the defense of conflict preemption is raised, § 1144(a) “governs the law that will apply to the state-law claims, regardless of whether the case is brought in state or federal court.” (citing Pryzbowski v. U.S. Healthcare, Inc., 245 F.3d 266, 277 (3d Cir.2001))