Testimony for
The American Psychological Association
Presented by
Russ Newman, Ph.D., J.D.
Executive Director for Professional Practice
The "Patient Access to Responsible Care Act of 1997"
H.R. 1415
Subcommittee on Employer-Employee Relations
Committee on Education and the Workforce
United States House of Representatives
October 23, 1997

Chairman Fawell and distinguished members of the Subcommittee, I am Dr. Russ Newman, Executive Director for Professional Practice for the American Psychological Association ("APA"). I am a clinical psychologist and an attorney. The APA, the largest association of psychologists with more than 152,000 members and affiliates engaged in the study, research, and practice of psychology, appreciates the opportunity to testify before you today. I am appearing before you to express the APA's support for H.R. 1415, the "Patient Access to Responsible Care Act of 1997" ("PARCA"). My remarks will focus on Section 4 of the proposed legislation, which provides that the Employee Retirement Income Security Act ("ERISA") is not intended to preempt state actions against managed care organizations ("MCOs") and administrative contractors for personal injury or wrongful death.

Under current law, individuals who have been injured by the negligent actions and decisions of MCOs offered through ERISA plans have been denied the opportunity to have their claims heard under otherwise applicable state law. This broad interpretation of the ERISA preemption clause has resulted in numerous unintended and unfortunate consequences. Specifically, the current law:

- deprives enrollees in ERISA plans from obtaining adequate remedies for injuries caused by the negligence of MCOs;

- fails to recognize that health plans have changed dramatically since the enactment of ERISA in 1974, and that MCOs now make decisions that directly impact patient care;

- allows ERISA plans to avoid accountability for their actions, and removes incentives to provide high quality care;

- creates an "unlevel playing field" in which MCOs and their enrollees are subject to different sets of standards based upon whether or not the MCOs are offered through ERISA plans; and

- wastes scarce judicial resources as courts are forced to wrestle with the appropriate scope of ERISA preemption, instead of focusing on the merits of individuals' actual state law claims.

The proposed amendment to ERISA's preemption clause would correct these serious problems. As I discuss these issues today, it is important to remember that the amendment would not create any new causes of action - it would simply allow courts to review individuals' claims on their merits, and apply whatever statutory or common law remedies have been adopted by state courts and legislatures.

I. Current Law Deprives Individuals of Adequate Remedies

With certain exceptions, Section 514 of ERISA broadly preempts all state laws that relate to" employee benefit plans governed by ERISA. 10 U. S. C. 1 144(a). The courts have consistently, but often reluctantly, concluded that state common law actions - such as negligence, malpractice, and breach of contract claims - are preempted when the MCOs' health care services are offered through ERISA plans. At the same time, the courts have held that the only remedies available to these enrollees are those specified in ERISA's civil enforcement provisions. Unfortunately, the remedies available under these ERISA provisions do not include compensatory damages for any resulting injuries or punitive damages for egregious MCO conduct. Enrollees can only recover the value of any benefits denied under the plan - an obviously inadequate remedy for individuals seriously injured by MCO actions. Given that approximately 125 million people receive their coverage through ERISA plans, the scope of this problem is distressingly broad.

The fundamental unfairness of ERISA preemption in this context is compellingly illustrated by the federal court decision in Corcoran v. United Health Care, Inc , 965 F.2d 1321 (5th Cir.), cert. denie , 506 U.S. 1033 (1992). In the Corcoran case, a couple alleged that the negligent actions of their ERISA plan's utilization reviewer had caused the death of their unborn child. After the mother's physician had recommended hospitalization during her high-risk pregnancy, the utilization reviewer refused to authorize the inpatient stay. Instead, the reviewer authorized part-time home nursing care. Several weeks later, during a time when no nurse was on duty in the mother's home, the fetus went into distress and died. In their wrongful death action, the parents alleged that the reviewer negligently denied their physician's recommended care, and negligently determined that home care was adequate for her condition.

Noting the breadth of the ERISA preemption clause, the court concluded that the parents' claims "related to" an ERISA plan, and were therefore preempted. The court reached this conclusion despite its recognition that the utilization reviewer was making medical decisions in performing its duties. Because of the absence of compensatory damages under ERISA's civil enforcement standards, the court found its holding particularly "troubling". In effect, ERISA's statutory scheme compelled the conclusion that the parents "have no remedy, state or federal, for what may have been a serious mistake. " For this reason, the court urged Congress to reevaluate the scope of ERISA preemption in order to protect the interests of employees - The PARCA amendment would serve this purpose and ensure that the unjust result in Corcoran is not repeated.

Countless other courts have likewise refused to hear state law claims for injuries caused by the direct, negligent actions of MCOs - whether negligent delay in treatment, negligent failure to approve recommended procedures, or negligent implementation of referral disincentives and cost-cutting programs. In one such federal appeals court case, an MCO rejected a physician's recommendation that a woman suffering from breast cancer undergo a bone marrow transplant. Cannon v. Group Health Service of Oklahoma, Inc , 77 F.3d 1270 (10th Cir.), cert. denie , 117 S.Ct. 66 (1996). Although the physician had stressed the importance of performing the transplant while the cancer was still in remission, the MCO claimed that the procedure was considered experimental during such times. After numerous requests for reconsideration, the MCO ultimately approved the procedure. By that time, however, the cancer had returned and the woman could no longer benefit from the treatment. She died shortly thereafter. As in Corcoran, the court noted that "[a]lthough moved by the tragic circumstances of this case and the seemingly needless loss of life that resulted, we conclude that the law gives us no choice but to affirm" the dismissal on ERISA preemption grounds.

The problems created by ERISA preemption are equally acute with respect to the provision of mental health services. In Tolton v. American Biodyne. Inc., 48 F.3d 937 (6th Cir. 1995), relatives of a deceased enrollee brought a similar wrongful death action against an MCO and its utilization reviewer. When the enrollee had sought treatment from his managed care company, he was referred to mental health providers employed by the utilization reviewer. During several contacts with these employees, the enrollee indicated that he was drug addicted, suicidal, and needed inpatient treatment. After numerous delays in treatment, referrals to crisis centers, physicians, and residential treatment centers, the enrollee committed suicide. The enrollee's survivors asserted state law claims against the MCO for malpractice, wrongful death, improper refusal to authorize benefits, and insurance bad faith. Citing Corcoran, the court concluded that all of the claims were preempted under ERISA.

PARCA would prevent such injustices by amending the ERISA preemption clause only for the narrow purpose of permitting MCO enrollees in ERISA plans to seek redress under state law for injuries caused by the negligent actions of the MCOs. Again, PARCA would not create any -new causes of action, but would simply remove the artificial barrier created by ERISA preemption and allow each state to apply and develop its own standards to MCOs offered under ERISA plans.

II. Changes in Health Care Delivery Since ERISA's Enactment in 1974

The absence of remedies is particularly troublesome given the dramatic changes in the health care system since Congress enacted ERISA in 1974. At that time, health care was delivered primarily under a "fee-for-service" system. Patients received health care services from local providers, often in small or solo practices, and the patients' insurance companies would retrospectively review and pay for the services provided. If an insurer determined that a particular service should not have been covered by the plan, the insurer might deny the reimbursement claim. As noted above, the civil-enforcement provisions enacted in.1974 created a remedy for patients inappropriately denied such reimbursement under ERISA plans.

Since 1974, however, MCOs have enjoyed explosive growth, and now cover the majority of the privately insured population. Unlike fee-for-service insurers, these MCOs have developed various mechanisms for prospectively reviewing the care provided to enrollees. MCOs frequently require pre-certification of inpatient hospital stays and other medical procedures, and generally review their providers' utilization of services on a prospective and concurrent basis. Many MCOs also restrict the referral practices of their providers, either explicitly through restricted provider panels, or implicitly through financial disincentives imposed on referring providers. These plans have even established practice guidelines for their providers, outlining courses of treatment deemed appropriate by the MCOs. As a result, MCOs are now active participants in the health care decision-making process for their enrollees, and not just administrators of reimbursement claims.

The limited ERISA civil enforcement remedies, which were designed to address the 1974 fee-for-service world, simply do not work in today's managed care world. Unlike a fee-for-service patient who has received care but has been denied reimbursement by his plan, patients who have suffered serious injury or death as a result of MCOs' negligence cannot be helped by recovering the cost of their plan benefits under ERISA's limited enforcement provisions. As Corcoran and the other cases I have discussed recognize, the MCO enrollees are effectively denied both federal and state remedies. Although these outcomes arguably result in a uniform application of laws to ERISA plans, the result is uniformly unfair and inconsistent with ERISA's broader goals to protect plan participants and beneficiaries. The fee-for-service plans in effect in 1974 were simply not involved in health-care decision-making, and the ERISA preemption provision could not have been intended to preempt actions challenging negligent health care decisions.

For these reasons, the courts have urged Congress to reconsider the scope of ERISA preemption. As noted above, the Corcoran court explained that:

[f]undamental changes such as the widespread institution of utilization review would seem to warrant a reevaluation of ERISA so that it can continue to serve its noble purpose of safeguarding the interests of employees. Our system, of course, allocates this task to Congress, not the courts.... 965 F.2d at 1338-39.

The limited amendment included in PARCA would achieve the result advocated in these cases, by giving ERISA plan participants and beneficiaries the opportunity to obtain relief for the negligent decision-making of their MCOs.

III. Current Law Inappropriately Shields MCOs from Liability.

In general, state negligence and malpractice laws serve not only to compensate those who have been injured by negligent actors, but also to act as a deterrent against negligent behavior. Providers who know that they will be held accountable for their actions are more likely to act prudently and carefully to prevent such occurrences. Because MCOs offered through ERISA plans are insulated from such liability, they have little incentive to monitor or change their actions to minimize negligent decision-making. The Corcoran court recognized that the current state of the law "eliminates an important check on the thousands of medical decisions routinely made in the burgeoning utilization review system. With liability rules generally inapplicable, there is theoretically less deterrence of substandard decisionmaking." 965 F.2d at 1338. Where plans contract for utilization review services, the plans will similarly have "one less incentive to seek out the companies that can deliver both high quality services and reasonable prices." Id.

Thus, by enacting the PARCA amendment, Congress can allow state law to operate as it was intended - to hold MCOs accountable for their negligent decisions, to compensate those injured by the MCOs' negligent decisions, and to create appropriate incentives to improve the quality of care offered to the 125 million individuals covered under ERISA plans nationwide. Again, PARCA does not dictate that states adopt, apply, or create particular state law remedies for individuals covered under ERISA plans. PARCA simply gives state courts and legislatures the opportunity to do so.

IV. ERISA Preemption Creates an "Unlevel Placing Field."

Because state laws often do provide potential remedies for non-ERISA enrollees in MCOs, the current ERISA preemption clause creates an inappropriate and "unlevel playing field." ERISA does not apply to individuals who receive their MCO coverage from non- employer sources (e.g., association policies, individual policies, and Medicare managed care plans). ERISA also does not apply to benefits provided by certain types of employers federal and state governments, and churches). Unlike ERISA enrollees, enrollees in these non-ERISA plans have been permitted to pursue state common law actions challenging the negligent actions of their MCOs. In one well-known case, for example, a California Medical Assistance recipient was discharged from the hospital earlier than her physician had recommended after a utilization reviewer refused to authorize a longer stay. Wickline v. State of California, 239 Cal. Rptr. 810 (Cal. App. 1986). Following the discharge, her condition worsened and her leg was amputated. Although the Wickline court ultimately concluded that the discharge conformed to the applicable medical standard of care, the court explained that a:

patient who requires treatment and who is harmed when care which should have been provided is not provided should recover for the injuries from all those responsible for the deprivation of such care, including, when appropriate, health care payors. Third party payors, of health care services can be held legally accountable when medically inappropriate decisions result from defects in the design or implementation of cost-containment mechanisms as, for example, when appeals made on the patient's behalf for medical or hospital care are arbitrarily ignored or unreasonably disregarded or overridden. Id. at 819.

The same California court subsequently held that an insurance plan's decision not to authorize continued inpatient hospitalization for a depressed and drug dependent patient could form the basis of a wrongful death action against the plan and its utilization reviewer. Wilson v. Blue Cross of Southern California, 271 Cal. Rptr. 876 (Cal. App. 1990). Although the patient's physician had recommended a three to four week hospitalization, the utilization review company denied coverage after twelve days of hospitalization. At that time, because the patient could not afford to pay for further inpatient care, he was discharged from the hospital. Two weeks later, he committed suicide. Following the reasoning in Wickline, the court held that there was sufficient evidence to conclude that the insurer's decision was a substantial factor in causing the patient's death. Even if all of the other facts were identical, this result would not have been possible had the patient obtained his coverage through an ERISA plan. The PARCA amendment would correct this inequity.

The current preemption provision may also deny ERISA enrollees the opportunity to seek remedies under state statutes. A recently passed Texas statute, for example, provides that MCOs may be held liable for the treatment decisions of providers over whom the MCOs have the right to exercise influence or control. Tex. Civ. Prac. & Rem. Sec. 88.002. It is fundamentally unfair that these potential remedies are currently available only to those MCO enrollees who happen to receive their coverage through plans that are not covered by ERISA. The availability of remedies for serious injuries should not depend, for example, upon whether an individual's employer is a state government rather than a private company, or upon whether an individual has received coverage under an individual plan rather than an employer plan. As a result of these artificial distinctions, the 125 million individuals who receive their coverage through ERISA plans are denied a meaningful remedy for the negligence of their MCOs.

V. PARCA Will End the Current Waste of Judicial Resources.

Finally, the existing ERISA preemption clause has forced injured individuals, MCOs, and state and federal courts to waste countless resources in a struggle to determine the exact scope of ERISA preemption. Courts have been forced to examine the specific allegations in each case, not in an attempt to determine whether the allegations are meritorious, but rather to determine whether they fall within the broad scope of the ERISA preemption doctrine. These courts have often drawn fine distinctions, for example, between actions claiming that the MCOs are vicariously liable for the treatment provided by their physicians, and actions claiming that MCOs are directly liable for their own medical and utilization review decisions. Cases have been bounced between state and federal courts, and have been dismissed or allowed to proceed, based upon these often meaningless distinctions. While some courts have allowed vicarious liability actions to proceed, they have recognized that the distinctions between the claims are blurry at best. As I have discussed today, MCOs and utilization reviewers have increasingly become directly involved in the medical decisions affecting their enrollees.

PARCA will refocus judicial resources. Courts and litigants will no longer need to waste resources determining whether an action may be brought. Instead, courts will be able to determine the merits of the ERISA health plans enrollee's case and determine responsibility for negligent actions.

IV. Conclusions.

The health care system has changed significantly since the enactment of ERISA in 1974. Although ERISA's enforcement provisions may have provided adequate protection in the fee-for- service world of that time, the subsequent expansion of managed care has undermined their effectivenes. The broad interpretation of ERISA's preemption clause has likewise undermined the availability of remedies under state law. In order to further ERISA's purpose to protect participants and beneficiaries of ERISA plans in this new health care system, Congress should --as numerous courts have suggested --- enact the PARCA accountability provision so that ERISA no longer shields ERISA managed health plans from the potential consequences of their negligent acts.

The enactment, of this amendment will not, as I have discussed, create any new causes of action. Rather, the amendment will allow all enrollees, regardless of the source of their coverage, to pursue whatever remedies their state courts and legislatures have deemed appropriate, will free the courts to focus on the merits of individual cases, and will help to ensure that all MCOs have an incentive to provide high quality services to their enrollees.

Thank you very much for the opportunity to testify on this critical issue.