US Supreme Court Invalidates Texas HMO Liability Law

On June 21, 2004, in Aetna Health Inc v. Davila, a unanimous U.S. Supreme Court overturned the Texas Health Care Liability Act (THCLA).  The THCLA was controversial Texas law that allowed patients to sue their heath plans if the patient was injured because a plan denied coverage for medical care.  The Supreme Court found that the THCLA was preempted by the Employee Retirement and Income Security Act (ERISA), which governs employer sponsored benefit plans.  In the wake of the Davila decision, Texas patients’ ability to sue HMOs is substantially limited by ERISA.  Texas physicians may face increased exposure, because injured patients cannot seek significant compensation from health plans.

Background

The Davila plaintiffs alleged that they suffered injury because their employer-sponsored HMO’s refused to cover certain medical treatments.  Juan Davila’s physician prescribed Vioxx for his arthritis.  Because Davila’s Aetna plan did not cover Vioxx, he took Naprosyn, a covered medication.  Davila alleged he suffered an adverse reaction to the Naprosyn, requiring hospitalization.  Plaintiff Ruby Calad’s physician recommended that she remain in the hospital following surgery.  Calad’s Cigna plan denied coverage for the extended hospital stay and Calad suffered post-surgery complications and had to be hospitalized again.

Invoking the THCLA, plaintiffs brought personal injury lawsuits in state court against the HMOs, alleging that the HMOs decisions to coverage were unreasonable and caused their injuries.

The Supreme Court Decision

The health plans removed the cases to federal court, arguing that the plaintiffs’ claims were preempted by ERISA.  ERISA governs suits against health plans for breaches of fiduciary duty and for recovery of wrongfully denied benefits.  The primary issue before the US Supreme Court was whether ERISA preempted the THCLA, which provided another remedy under state law for injuries caused by an ERISA fiduciary.

The Court concluded that HMO decisions about whether or not to cover medical treatment are part of the ordinary fiduciary responsibilities of managed care plan administration.  The Court found that these fiduciary responsibilities are appropriately governed by ERISA.  According to the law and court interpretations of ERISA, ERISA preempts all state laws related to employee benefits.  The Supreme Court therefore found that the ERISA preempted the THCLA.  Under ERISA, the only damages the plaintiffs could recover is the cost of the medical care denied by the health plans (ie: the cost of the Vioxx prescription or the cost of an additional night of hospital care).  Under ERISA, the plaintiffs cannot recover for their medical expanses or suffering caused by the HMO’s decision to deny coverage.

The Effect of Davila on Physician Liability Exposure

The Davila ruling severely diminishes injured patients’ ability to recover from health plans if the plans deny coverage for necessary treatment.  This decision may increase the risk that patients may sue their doctors if their health plans refuse to approve coverage for a recommended test or treatment.  This puts physicians in a difficult position – if the health plan denies coverage, patients may not be able to pay cash for treatment.  Many physicians cannot afford to provide charity care to patients without coverage. If the patient does not receive treatment and has a bad outcome, the physician may be at risk of a lawsuit.

Physicians may respond to the Davila decision by terminating their managed care contracts as a means of reducing liability exposure.  Prudent physicians will also document communications with patients who refuse recommended treatment because of cost.  Physicians who appreciate that ERISA preemption has put them at increased risk of lawsuits will call their members of Congress to demand protection in the form of a change to ERISA itself.

Written by Sheryl Tatar Dacso, J.D., Dr.P.H. and Katherine A. White, J.D. of Law Office of Sheryl Tatar Dacso, PLLC with assistance from Scott Novak, a legal intern with the Firm.