Recent Supreme Court Rulings Affecting Employer-Sponsored Health Plans

December 3, 2004 Advisory

On June 21, 2004, in Aetna v. Davila, the U.S. Supreme Court unanimously held that ERISA completely preempts state law tort claims against HMOs for injuries allegedly suffered as the result of the HMO's failure to authorize physician-recommended care. The decision struck down a Texas law, the Texas Health Care Liability Act, which made insurers and managed care companies liable for damages caused by their failure to exercise ordinary care in making treatment decisions, and limited the application of the Court's decision in Pegram v. Herdrich, 430 U.S. 211 (2000), in which the Supreme Court had found that ERISA did not preempt claims against HMOs making "mixed" treatment and eligibility decisions. In the new case, the court clarified that the "Pegram exception" to ERISA preemption only applies where the underlying harm is caused by a treating physician exercising medical judgment. In the Pegram case the HMO doctor had determined both the course of treatment and whether the treatment would be covered by the HMO, whereas in the Davila case the HMO had only decided whether a certain treatment would be covered under the terms of the plan.