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Defining the Limits of Broad, Complete ERISA Preemption in Health Care Excessive Fee Cases

On Behalf of | Aug 19, 2019 |

Over several decades, courts have developed a rich history of broad, complete ERISA preemption of any and all claims in state courts as they relate to ERISA plans and participant rights to receive benefits and coverage pursuant to ERISA. Complete ERISA preemption differs from express, conflict ERISA preemption because it allows removal of a case sitting in state court to federal court.

It is black letter law that any state-law cause of action that duplicates, supplements, or supplants the ERISA civil enforcement remedy – ERISA § 502 – conflicts with the clear congressional intent to make the ERISA remedy exclusive and, is therefore, completely pre-empted by ERISA. And, ERISA 502(a) sets a broad universe of potential claims that participants, beneficiaries, fiduciaries, and the DOL can bring.

While for decades the Supreme Court, and lower appellate courts, had wrestled with defining the scope of complete ERISA preemption, the Supreme Court, in Aetna Health Inc. v. Davila, set the standard courts currently employ to judge whether a claim is subject to complete ERISA preemption under ERISA § 502(a).

The facts of Davila involved consolidated cases in which two individuals, Juan Davila and Ruby Calad, participants in ERISA regulated employee benefit plans, brought state law claims against their respective health maintenance organizations (HMOs) for refusing to pay for certain treatment and services recommended by their treating physicians. The Supreme Court held that the Davila plaintiffs’ claims fell within the purview of ERISA § 502(a) because their claims involved attempts to recover denied benefits – and “only to rectify a wrongful denial of benefits promised under a ERISA-regulated plan”

In reaching this decision in Davila, the Supreme Court established a two-part test to determine whether a claim falls “within the scope” of § 502(a)(1). Specifically, the Court directed that claims are completely preempted by ERISA if they are brought (i) by an individual who at some point in time, could have brought his claim under ERISA § 502(a), and (ii) under circumstances in which there is no other independent legal duty that is implicated by a defendant’s actions. This test involves a dual inquiry because a state-law cause of action is preempted only if both prongs of the test are satisfied.

A discrete issue that has lingered in the aftermath of Davila is to what extent a breach of contract claim is preempted by ERISA where a healthcare provider sues to obtain benefits under a contract with an ERISA regulated health plan.

In such cases, to determine the scope of ERISA preemption under the first prong of Davila, several circuits have adopted a “rate of payment” versus “right of payment” under which claims involving only underpayment are not preempted, whereas claims that were denied because coverage was not afforded for all the submitted procedures may be preempted. See e.g., Conn. State Dental Ass’n v. Anthem Health Plans, Inc., 591 F.3d 1337, 1349-50 (11th Cir. 2009) (citing Lone Star OB/GYN Assocs. v. Aetna Health Inc., 579 F.3d 525, 533 (5th Cir. 2009)); Montefiore Med. Ctr. v. Teamsters Local 272, 642 F.3d 321, 331-32 (2d Cir. 2011).

These cases – analyzing the application of the first element of the Davila test – hinge on whether the Court finds that the provider-insurer agreement or ERISA creates a dispute about the “rate of payment” and typically no preemption results, or a “right to payment” dispute which involves benefit and coverage determinations under the terms of the respective ERISA healthcare plan and thus, preemption does result.

Such is the backdrop for the Sixth Circuit’s recent decision in K.B. v. Methodist HealthCare – Memphis Hospitals, 979 F. 3d 765 (6th Cir. 2019). In K.B., the Sixth Circuit examined the differences between rate of payment versus right of payment dynamic with a twist. Rather than a health care provider claiming breach of contract for underpayment against an ERISA plan, in K.B., a class of individual insureds brought the breach of contract claim, alleging that Methodist Health Care Memphis Hospitals was overcharging for services rendered.

Specifically, the insureds alleged that the Defendant hospital had contracts with their insurers (some ERISA healthcare plans but not all) that set fixed and predetermined prices for many of the services the hospital provided for them, and that the hospital charged plaintiffs a price higher than the negotiated contract price for services, thereby breaching their contractual duties to them as beneficiaries of the plans, and in the process, denying them insurance benefits.

In evaluating the core of these allegations, the District Court, the United States District for the Western District of Tennessee, determined that in order to conclude whether Plaintiffs overpaid, or that Plaintiffs were entitled to reduced fees, it must examine not only the contract between Plaintiffs and Defendant, but also the contract between Defendant and the applicable insurance provider(s), which would involve an analysis of coverage determinations by each applicable insurance provider(s). Specifically, the District Court concluded that “if there is an ERISA provider, as there is here, then a determination of whether Defendant breached its contract with Plaintiffs derives entirely from the particular rights and obligations established by [ERISA] benefit plans.” Essentially, the District Court decided that the plaintiffs’ breach of contract claims involved an analysis of plan coverage determinations, and therefore, fit in the right to payment category of cases.

But the Sixth Circuit disagreed and reversed the District Court’s decision. The Sixth Circuit reasoned that Defendant hospital’s liability stemmed from the contract between it and the insurer’s health care plans – not the terms of the plan itself.

The Court, in reaching this conclusion, attempted to make sense of this novel set of facts by comparing it to a lay-person example of a restaurant charging customers more than the price listed on its menu. The Court emphasized that “you sue the first restaurant because it owed you a duty to charge the menu price. Although the restaurant could claim that the terms of your credit card agreement are relevant, the restaurant’s duty to charge you the agreed-upon price comes from the terms of its menu, not the terms of your credit card. So your claim about menu price is independent of your credit card agreement.” Under this hypothetical comparison, the credit-card agreement with the individual consumers would be the terms of the ERISA plan.

While the Court went to lengths to justify its decision through hypotheticals and suggestions about how Plaintiffs could have modified their allegations to move the needle from a rate of payment to a right to payment case that would completely preempt Plaintiffs’ claims, it did concede that “the only reason a court may need to consider the contents of Knox-Bender’s ERISA plan is to calculate damages.” The Court, however, concluded that where the terms of an ERISA plan are only relevant to calculate damages, ERISA does not preempt the state law’s claim.

The Sixth Circuit’s reversal of the District Court has significant implications for potential Defendants, e.g., health care providers providing services to insureds pursuant to contracts with ERISA health care plans, and plaintiffs alleging excessive health care charges, like the Plaintiffs in K.B.

First, without the preemption defense, health care providers will be forced to battle breach of contract suits in state courts – if there is not another basis of federal jurisdiction – that might be less familiar with the terms and conditions of ERISA health care plans and plan contracts with healthcare providers to provide services to insureds. Second, the K.B. decision – that excessive cost of healthcare services provided does not involve a denial of coverage or benefits – could be extended to apply to other fact sets where insureds challenge the cost of healthcare services provided in connection with an ERISA health care plan.

It will be interesting to see if a similar case is brought in a different circuit if the court would side with the District Court in K.B. or agree with the Sixth Circuit – that an insured contesting the costs of an ERISA healthcare plan provider does not result in a denial of coverage and is a rate (not a right) to payment case. The K.B. decision has the potential to change the landscape of ERISA preemption in the health care arena and limit the usual broad extension of ERISA preemption. Time will tell if it does.