‘74 Law Aided HMOs, Not Workers

This week’s bitter Senate battle over patients’ rights to sue their HMOs has its origin, oddly enough, in a 1974 pension reform law.

What began as a worker-friendly measure that regulated corporations has evolved into a corporate shield against lawsuits from disgruntled employees and their families.

It is a classic example of the Law of Unintended Consequences.

Lawyers who worked on the original law and scholars who have studied it agree that Congress did not intend to take away the rights of ordinary employees to sue their insurance companies or their health care providers.

“Nobody foresaw this in 1974,” said University of Michigan professor Peter D. Jacobson, an expert on health law.

“All the focus then was on pensions,” said Washington attorney Michael S. Gordon, who was an aide to then-Sen. Jacob Javits, a New York Republican and a co-sponsor of the bill. “Nobody was worried much about health insurance because it was available and reasonably cheap.”

Waking Up to New Reality

By the 1990s, however, millions of employees and their lawyers had discovered a new reality. They depended on their employer’s health plan but had no legal rights to challenge its decisions, thanks to the unforeseen effect of the 1974 law.

How this law solved one problem but created another offers a cautionary tale for lawmakers considering a new round of reforms.

In the 1970s, reformers in Congress were driven by sad tales of older workers who were fired just months before they had earned their pensions. They also were spurred by scandals involving diverted pension funds, some involving the Teamsters Union, others involving private companies. Still other workers found themselves without their promised pensions when manufacturers went bankrupt, leaving no money for their retirement.

So Congress decided to set national rules for private pensions and other employee benefits such as disability pay. Workers were given vesting rights in their pensions after five years on the job, and trustees were required to keep the funds safe and secure.

Despite early opposition by business groups, the Employee Retirement Income Security Act(ERISA) passed the Senate and House in August 1974 with only two dissenting votes.

President Ford signed the measure into law, hailing it as a great victory for American workers. They could have faith that they would receive the pensions they had been promised.

It was not until years later that the law’s effect on health care became apparent.

The reformers had been so intent upon protecting “employee benefit plans” that they said the federal rules “shall supersede any and all state laws” that might interfere with them. In the 1970s, most workers had health insurance policies that were paid for by their companies. If they had a problem with a doctor or their insurer, they could sue them in state court under state law, the same way that most lawsuits are filed.

But in a three-step process, the courthouse doors were closed to such claims.

First, the Supreme Court ruled that because ERISA’s federal rules supersede state law, workers cannot sue in state court for any claim involving an “employee benefit plan.”

Second, the court ruled that health insurance provided by an employer must be considered part of an “employee benefit plan,” not a true insurance policy. States regulate insurance but cannot regulate employee benefit plans, the court said.

The key decision came in 1987, in the case of Pilot Life Insurance vs. Dedeaux. It tossed out a lawsuit brought by a Mississippi man, Everate Dedeaux, who had injured his back on the job and sued for up to $750,000 when he did not receive the promised disability pay.

And third, the court sharply narrowed what employees could win in federal court. The justices ruled that patients covered by employer-sponsored plans could seek only a deserved benefit that was not provided rather than general damages.

For example, if a health care provider refused to pay for a diagnostic test and the employee later died of an undetected cancer, the survivors could sue only for the cost of the test, not for the loss of their loved one.

These mid-1980s legal decisions received relatively little attention at the time.

“Pilot Life [the 1987 ruling] was a sleeper. It was one of those decisions that you wake up to later and realize the world has changed,” said Marc I. Machiz, a Washington lawyer who practices health care law.

Over the last decade, nearly everyone, including members of Congress, awoke to realize the new world of health care was not what they expected.

Although Congress had never voted to bar patients from suing their HMOs, that was the effect of ERISA and related court rulings. Now lawmakers who are considering patients’ rights legislation are, in essence, deciding how or whether to break down a legal roadblock they did not erect in the first place.

Gordon said senators who worked on the 1974 law would not be happy with what has happened since.

Experts Unsure How to Fix It Now

“They didn’t think they were precluding suits for damages,” Gordon said. “And there’s no doubt in my mind if the issue had come up, they would have been in favor of the strongest possible legislation allowing damage claims.”

But legal experts--as well as lawmakers and lobbyists--are divided on what is the best remedy now.

Although insurers and health care providers generally oppose any measure that authorizes new lawsuits, they and most others support the notion of state-sponsored independent review boards that hear appeals from patients who have been turned down for treatment by an HMO. A panel of three doctors decides whether the treatment was medically necessary and, therefore, should have been provided.

During last year’s presidential campaign, then-Gov. George W. Bush pointed to the independent review board in Texas as a kind of reform he supports. Thirty-six states, including California, have created similar review boards.

But late last year, the U.S. 5th Circuit Court of Appeals struck down the Texas review board as another instance of unwarranted state meddling with a federally regulated employee benefit plan. The “independent review provisions conflict with ERISA,” the appeals court said, because the boards can force HMOs to provide extra treatment.

In October, Texas state lawyers appealed to the Supreme Court on behalf of the state’s insurance commissioner, Jose Montemayor. “States have a right to establish checks and balances over managed care through independent review laws that protect the health and well-being of their citizens,” they argued in the case of Montemayor vs. Corporate Health Insurance Inc., 00-665.

A month later, Bush was elected president, and a second U.S. Court of Appeals, sitting in Chicago, upheld the Illinois review board against a similar challenge.

The Supreme Court asked the Justice Department for its views on whether the state-sponsored independent review boards are allowed under the federal law.

Earlier this month, the Bush administration essentially punted, telling the justices they should stay away from the Texas and Illinois cases for now while Congress debates HMOs and the proposals for a patients’ bill of rights.

By coincidence, the justices are due to consider both appeals today and may decide as soon as Monday whether to take up the issue.