The United States Supreme Court set off a flurry of activity in the Eastern District of Pennsylvania as a result of its recent holding in Rush Prudential HMO, Inc. v. Moran , 122 S.Ct. 2151, 153 L.Ed.2d 375 (2002). In Rush , the Supreme Court held that an Illinois state law which required an HMO to submit reimbursement disputes over whether a procedure is medically necessary to an independent medical reviewer was not preempted under ERISA and was encompassed by the  ERISA insurance "savings clause."  Rush Prudential refused to comply with the state law requirement and when faced with a state court lawsuit, removed the action to federal court seeking protection under ERISA.

Since then, five opinions have been rendered in the Eastern District, all relying on the Rush decision, regarding the question of whether a claim under Pennsylvania's bad faith insurance practices statute, 42 Pa.C.S.A. § 8371 is preempted by ERISA. Four judges have held that the bad faith statute is preempted; one has held it is not. Compare, Sprecher v. AETNA U.S. Healthcare Inc. , 2002 U.S. Dist. Lexis 15571 (Buckwalter Aug. 19, 2002); Kirkhuff v. Lincoln Technical Institute, Inc. , 2002 U.S. Dist. Lexis 17196 (Bartle Sept. 6, 2002); Smith v. Continental Casualty Co. ,, 2002 U.S. Dist. Lexis 18312 (Waldman Sept. 16, 2002; Bell v. Unumprovident Corp. , 2002 U.S. Dist. Lexis 17693 (Baylson Sept. 19, 2002) with Rosenblum v, UNUM Life Ins. Co. of America , 2002 U.S. Dist. Lexis 14155 (Newcomer July 29, 2002)(not preempted).  Although the majority of opinions thus far has been in the insurer's favor, the one contrary opinion leaves open the possibility of bad faith claims being presented in lawsuits concerning employee health plans. The Third Circuit has yet to address this preemption question in light of the Rush holding.

In Rush , the HMO unsuccessfully posited that the Illinois law in question created an alternative remedy by requiring an independent second medical opinion, in support of its contention that ERISA preempted the state law and the legal action.

The Supreme Court rejected this argument, holding that the Illinois law did not create alternative remedies to those provided by ERISA and that a challenge to the decision of the plan administrator following the receipt of the second medical opinion would be encompassed by Section 1132 of ERISA.  The court reasoned that the only benefits an insured could potentially receive under the state law were the same benefits the insured could seek under § 1132(a) of ERISA, namely a determination as to claim entitlement.  The court noted that the reviewer was called upon to render a medical opinion and not provide plan interpretation; although, it noted that the reviewer might engage in a mixed analysis of plan language and medical evidence.

The court also rejected the proposition that the Illinois statute would effectively eviscerate the discretionary decision making authority of the plan administrator by subordinating the plan administrator's decision to that of an independent reviewer.  On this front, the court commented that although the reviewer's determination could carry great weight in a section 1132(a) action,  the state law did not expressly conflict with ERISA case law governing the standard of judicial review in 1132(a) actions [whether the court is to review the plan administrator's decision de novo or with deference under an arbitrary and capricious standard or like standard of scrutiny]. In essence, the reviewer's judgment consists of just another piece of information for the plan administrator to take into account in making a determination.

The Illinois law while prohibiting the insurer from employing unfettered discretion in the determination of medical eligibility did not impact ERISA's enforcement scheme and, in the court's view, was no different from other types of substantive state regulation of insurance contracts which have been held in the past to survive preemption.

(The regulation at issue in Rush , however,  was significantly different from Pennsylvania's bad faith statute.)  Pennsylvania's bad faith statute imposes a civil remedy, including punitive damages and emotional distress damages, for the improper handling of claims or the unreasonable denial of policy benefits by insurers - <which is not permitted under ERISA>.

ERISA expressly preempts all state causes of action except "any law of any State which regulates insurance." 29 U.S.C.S. § 1144(b)(2)(A). In determining whether a statute regulates insurance, courts first must consider whether, from a common sense view, the state statute in question regulates insurance. Each Eastern District judge has agreed that the bad faith statute clearly only applies to insurance companies and has, in its intent, the regulation of insurance companies. 

Second, courts must review the McCarran-Ferguson factors to determine whether the state statute fits within "the business of insurance" under the McCarran Ferguson Act and is saved from ERISA preemption.  These factors are: (1) whether the practice has the effect of transferring or spreading the policyholder's risk; (2) whether the practice is an integral part of the policy relationship between the insurer and the insured; and (3) whether the practice is limited to entities within the insurance industry.

Although the bad faith statute is directed to the insurance industry, each of the five Eastern District judges agreed that the bad faith statute does not serve to spread a policyholder's risk.

The discord centers around the second prong: whether the state statute effects an integral part of the policy relationship between the insurer and insured. The majority have held that the bad faith statute does not alter the terms of the contract between the policyholder and the insurer because the insurer always has an obligation to act in good faith. The bad faith statute, in the opinion of the majority, merely creates an opportunity for a policyholder to seek punitive damages for the reckless or intentional mishandling of the claim but does not change the agreement between the two parties.

Judge Newcomer, on the other hand, has held that the Pennsylvania bad faith statute satisfies the second McCarran-Ferguson prong. Judge Newcomer interprets the Rush decision as suggesting that a statute concerns an integral part of the contractual relationship where it affords the parties rights or remedies other than those originally bargained for.

The majority view distinguishes the Rush holding, correctly so, based on the type of regulation in question. The regulation, addressed in Rush , did not create new cause of action or provide a right or remedy not otherwise provided under ERISA; rather, it spelled out an insured's right to a second opinion on benefit eligibility. Pennsylvania's bad faith statute, however, provides for a new remedy - punitive damages and interest penalties which have not been authorized by Congress under ERISA.

The Third Circuit has now been requested to review these decisions. The timing is appropriate. Although the Rush holding initially sent shockwaves through the lower courts, its holding is not as broad as feared. Even if the Third Circuit accepts Judge Newcomer's decision that ERISA does not preempt a bad faith claim under Section 8371, the court will have to address whether a putative plaintiff under a Section 8371 action can receive punitive damages which are not otherwise authorized by ERISA.

While it is questionable as to whether the Rush holding directly impacts the question of preemption of Pennsylvania's bad faith statute, it does have ramifications for every state that has a similar regulation to the Illinois regulation.

In Pennsylvania, every managed care plan must establish and maintain an internal and external grievance procedure which is similar to the Illinois requirement. See   40 P.S. § 991.2161; 991.2162.  A managed care plan is defined to include any health care plan that "uses a gatekeeper to manage the utilization of health care services; integrates the financing and delivery of heath care services to enrollees by arrangements with health care providers selected to participate on the basis of specific standards; and provides financial incentives to enrollees to use the participating health care providers in accordance with procedures established by the plan." 40 P.S. § 991.2102.

The Pennsylvania Quality Health Care Accountability and Protection Act requires a managed care plan to establish an internal grievance process with two levels of review in which the enrollee must be able to file a written grievance regarding the denial of payment for a health care service.  40 P.S. § 991.2161.  The Act defines "grievance" as a request by an enrollee or health care provider (with the consent of the enrollee) to "have a managed care plan or utilization review entity reconsider a decision solely concerning the medical necessity and appropriateness of a health care service." 40 P.S. § 991.2102.

In the event either party is dissatisfied after the internal grievance procedure is complete (as set forth in § 991.2161), the managed care plan must also maintain an external grievance procedure which should be conducted by an independent utilization review entity not directly affiliated with the managed care plan. 40 P.S. § 991.2162.

The external process should be conducted by one or more licensed physicians in the same or similar specialty that typically manages or recommends treatment for the health care service being reviewed. Id.   The independent agency shall determine whether the health care service in question was medically necessary and appropriate under the terms of the plan . Id.

We note that the Pennsylvania statute differs slightly from the Illinois law, as the Pennsylvania statute allows an independent decision maker to determine whether a procedure is medically necessary and appropriate under the terms of the plan; whereas under the Illinois statute, the only question is whether the treatment is medically necessary. Both statutes require an independent evaluation by a non-affiliated health care provider who possesses similar credentials to the health care provider in question.  Hence, like the Illinois statute, the Pennsylvania statute allows an enrollee to obtain a second opinion regarding the medical necessity of a treatment.

Based on the Rush Prudential holding, we believe that this Pennsylvania law would likely withstand a preemption challenge.  In Rush Prudential , the court noted that although the Illinois law did not state that the reviewer should refer to the definition of medical necessity contained in the contract, the review did so.  The court assumed that "some degree of contract interpretation is required" under the state law, if not interpretation were required then it would be questionable whether the law regulated the insurance contract within the ambit of the "savings clause" . 

The Rush Prudential decision will highlight the availability of independent review rights for managed care participants.  Referral to independents for external grievances should carefully define the medical question presented as distinct from contract interpretation.  Separation of the issues, to the extent possible, should allow the plan administrator to continue to exercise the appropriate discretion (under the terms of the plan) with respect to contract interpretation, using the independent's medical opinion.  Further, given the flavor of the Rush Prudential decision, district courts will be more likely to engage in closer scrutiny or de novo review of any managed care plan benefit determination.  Of course, plans lacking language entrusting the administrator with final authority on benefit determination, will be subject to a de novo standard of review of eligibility determinations under Firestone Tire . 

Hence, while Rush Prudential opened the door to the issue of preemption of Pennsylvania's bad faith statute, its holding is likely distinguishable. The ramifications of Rush Prudential are more readily applicable to Pennsylvania's Quality Health Care Accountability and Protection Act which, under the Rush holding, may not be pre-empted by ERISA.

Further questions regarding Rush Prudential HMO, Inc. v. Moran may be directed to William T. Salzer, Esquire and Kori Ann Connelly, Esquire of the Employment Law Practice Group of Swartz Campbell LLC.