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Health Care Program

Health Insurer Liability and Managed Care

ARCHIVE REPORT: This NCSL report was compiled and maintained as a "hot topic" between 1998 and 2004.  However the landscape changed dramatically in 2004 due to the U.S. Supreme Court striking down most state laws on liability. This page is now an archive reflecting state actions, including ongoing ERISA preemption issues, but it is no longer updated for current session activity.  Some links may no longer be live.

At least 170 million Americans are enrolled in HMOs (health maintenance organizations), PPOs (preferred provider organizations) and other managed care organizations. What happens when these organizations appear to override the recommendations of physicians, and limit or deny coverage for medical care or treatment? 

Between 1997 and 2001, state and federal policymakers have responded to these issues by filing legislation and, in some states, enacting new laws.  

U.S. Supreme Court Strikes Down State HMO Liability Laws.  On June 21, 2004 the Supreme Court ruled unanimously that patients cannot sue their HMO under state laws for failing to pay for doctor recommended care.  Experts descibe the decision as ruling that federal ERISA law "completely pre-empted such lawsuits brought in state court."  This ruling against the states has a substantial adverse legal impact on the enacted laws in the ten states listed below, plus two additional states, although the number of active cases brought under these state laws evidently is not large.  Also, note that some of the "right to sue" provisions are part of broader laws, affecting rights to independent appeals and other managed care procedures.  - Summary and Full Text of Court Opinion - Aetna Health v. Davila (02-1845) and Cigna v. Calad et al. (03-83)-23 pages - ERISA Update: The Supreme Court Texas Decision and Other Recent Cases  Policy on the state health policy implications of ERISA’s preemption. clause. (Brief 8/04, 7 pages)  link updated 11/07

STATE LAWS:
In 1997 Texas became the first state to pass a "right to sue" law. In 1999 Georgia became the second state to allow law suits in certain circumstances, while California's liability bill also was signed into law. In March 2000 Washington became the fourth state with such a liability law. In April 2000, Arizona, Maine and Oklahoma enacted similar laws.   A 2001 law in West Virginia, signed April 30, also established a limited form of liability.  The New Jersey legislature passed a liability bill (S.1333) signed by the Governor in July 2001. The North Carolina legislature's managed care bill including liability (S.199) was signed in October 2001. These actions brought the "right to sue" total to ten states as of the date of the U.S. Supreme Court decision in June 2004.

In addition, Oregon also enacted a more limited law in 2001 that allows patients to sue their insurer only if the plan does not submit to an external review. Louisiana has a limited 1999 law that establishes a "cause of action" related to external review decisions (H.B. 2083 of '99).  Finally, Missouri (1997) and New Mexico (1998) passed laws that utilize other, more limited, approaches to liability.

Earlier Court History:  On November 3, 2003 the United States Supreme Court agreed to hear two cases that address the legal questions of the right to sue. As the Washington Post noted, "For patients, the court's answer could determine whether they can win large amounts of money in court if health insurers refuse to pay for beneficial or even lifesaving treatment." If the court rules for the "insurers, it would mean that state courts, and the potential they offer for large damage awards from juries, would be off limits for most negligence or malpractice suits against HMOs. Lower courts have divided over the question of whether federal law allows the kind of negligence or malpractice suit at issue in this case." ^[1]  The case was heard for oral argument before the Supreme Court on March 23, 2004.

Earlier history:  On June 20, 2000, the 5th Circuit U.S. Court of Appeals upheld the Texas law [1B], in a legal opinion that updates the legal analysis of state activities on liability. This decision is not legally binding on states in other circuit court jurisdictions. An earlier (June 12, 2000) U.S. Supreme Court decision on financial incentives by HMOs does not affect state laws on the subject. In fall 2000, the 7th U.S. Circuit Court of Appeals in Illinois upheld Illinois' independent review law, stating the law does not conflict with ERISA.[2] The case does not directly address the "right to sue", but is seen as a disagreement with the 5th Circuit, above.   [3]

In addition, a total of 27 states have banned the use of "hold harmless" clauses in managed care company contracts with providers such as doctors and hospitals. These laws mean that the managed care organization no longer is "relieved of responsibility" for treatment or services, but generally such laws do not create a right to sue. Some states also have enacted "consumer hold harmless clauses" intended to protect HMO consumers from liability for medical bills owed to doctors or other providers. Some examples of these laws are included in the chart below.

Since the 1999-2000 sessions of the U.S. Congress, several bills proposed to address this issue, although none became law. In 2001, bills passed the Senate and House with differing provisions on liability, but died in conference committee at the end of 2002.  No new measures were passed in 2003.  See NCSL's Health Committee for related activities.

This web page brings together some of the current resources on insurer liability, with a special emphasis on the deliberations and decisions of state legislatures. It includes NCSL research as well as links to public and private web resources.

Medical Malpractice: NCSL has developed extensive materials and online reports on the similar but separate topic of Medical Malpractice lawsuits, and the insurance required to protect providers against such lawsuits. Visit the NCSL Insurance Programs' Medical Malpractice web pages. [updated 2/07]

• "ERISA Preemption and State Health Reform" by Jay E. Shushelsky, AARP Foundation Litigation , PowerPoint summary for Iowa, 9/19/07. PDF.
• ERISA Implications for State “Pay or Play” Employer-Based Coverage March 2005
• "Key Characteristics of State Managed Care Organization Liability Laws: Current Status and Experience" - by Patricia Butler for Kaiser Foundation, August 2001 [16 pp.].
• ERISA Preemption Primer - by Patricia Butler, published by the Alpha Center, Washington, DC, 2/2000 [11 pages] -link updated 8/02.
• ERISA Preemption Manual for State Health Policy Makers - by Patricia Butler, published by the Alpha Center, Washington, DC, 2/2000 [126 pages].
• Managed Care Liability: An analysis of MO & TX laws by Patricia A Butler, JD, DrPH; published by Kaiser Family Foundation - [6 pp. Executive Summary]- link updated 9/99.

STATE MANAGED CARE LIABILITY LAWS - Web Resources (laws provided courtesy of official state legislature web sites)

West Virginia

Footnotes:
[1] - The cases pending before the US Supreme Court are are Aetna Health Inc. v. Davila, 02-1845, and Cigna Healthcare of Texas Inc. v. Calad, 03-83. (March 2004)
[1B] - Corporate Health Insurance, Inc v. Texas Dept. of Insurance, 5^th U.S. Circuit.
[2] - Debra C. Moran and the State of Illinois v. Rush Prudential HMO, Inc., 7^th U.S. Circuit.
[3] - In May 2001 in Florida, attorneys for 600,000 doctors who claim the managed care industry has cheated them out of more than $1 billion asked a federal judge to certify their claims as a single class-action lawsuit. Health care industry attorneys said that it would be too unwieldy to combine virtually the entire medical community in one case and argued that the legal claims are so different that they must be pursued individually. This case is not connected to state laws on liability.

For more information: Richard Cauchi, NCSL Health Program, Denver.  For legislators and staff: email:
health-info@ncsl.org .

Visit this web site again: www.ncsl.org/programs/health/liable.htm