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Examining State Law Claims Under ERISA At Second Circuit

Medical providers seeking to pursue state law claims for payment from health care payers scored a win in the Second Circuit last month in a holding that affirms providers’ ability to hold health care insurers and other payers to their payment representations and promises.

In McCulloch Orthopaedic Surgical Services PLLC v. Aetna Inc., No. 15-2150, 2017 (2d Cir. May 18, 2017), the Second Circuit set out to decide “whether [the Employee Retirement Income Security Act] ERISA completely preempts an out-of-network health care provider’s promissory estoppel claim against a health insurer where the provider (1) did not receive a valid assignment for payment under the health care plan and (2) received an independent promise from the insurer that he would be paid for certain medical services provided to the insured.” The court held that ERISA does not completely preempt this type of claim.

By way of background, Dr. Kenneth E. McCulloch, an orthopedic surgeon, asserted a state promissory estoppel claim against Aetna and several of its affiliates in New York state court after his patient’s ERISA plan failed to pay him for two surgeries at 70 percent of the “usual and customary” rate. Aetna, which served as the plan’s third-party administrator, orally promised McCulloch that the plan would pay this particular rate for these surgeries. McCulloch — an “out-of-network” provider with no other contractual relationship to Aetna — relied on these promises and performed the surgeries. McCulloch sought to recover the difference between the amount Aetna promised to pay and the amount the plan actually paid.

Aetna removed the case to federal court on the grounds that ERISA completely preempted the claim. The Southern District of New York denied McCulloch’s motion to remand the case, finding instead that McCulloch’s claim was completely preempted. This resulted in the federal court’s dismissal of the physician’s state law claims against Aetna.

ERISA — unlike many other federal statutes — can provide a jurisdictional basis to remove a state legal claim to federal court where (a) the plaintiff is the type of party that can bring a claim under ERISA, and (b) the claim itself can be construed as a claim for plan benefits under ERISA § 502(a)(1)(B), 29 U.S.C. § 1132(a)(1)(b). However, if there is another “independent legal duty” that forms the basis of the legal claim, it is not preempted, and can proceed in federal court. See Aetna Health Inc. v. Davila, 542 U.S. 200 (2004).

Medical provider legal claims can prove to be complex under ERISA’s “complete preemption” analysis. While medical providers themselves are not the type of party authorized by statute to bring claims under ERISA in their own capacities, ERISA does allow plan “participants” and “beneficiaries” to sue, and medical providers can in some instances obtain assignments from their patients to assert ERISA legal claims and be paid ERISA plan benefits. Providers may be able to sue health care payers in two capacities: They can assert their own rights under state law that arise independent of any ERISA plan provisions, and they can also sue under ERISA as assignees to their patients’ rights to collect benefits under the ERISA plan if a valid assignment exists.

In the McCulloch case, the Second Circuit, applying the test for complete preemption first established by the U.S. Supreme Court in Aetna v. Davila, reversed the lower court decision that had ruled the doctor’s state law claims were preempted. First, the court held that McCulloch could not have brought his state law claim under ERISA because medical providers are not ERISA entities. While McCulloch did obtain an assignment of the patient’s right to payment under the plan, and the plan did pay McCulloch directly for treatments rendered, this assignment was not valid in light of an “anti-assignment” provision in the plan document prohibiting the patient from assigning rights to out-of-network providers.

Second, McCulloch’s state law claim did not arise out of the terms of the plan; instead, it rested “on whether Aetna promised to reimburse him for seventy percent of the [usual-and-customary] rate, whether he reasonably and foreseeably relied on that promise, and whether he suffered a resulting injury.” The plan itself “simply provid[ed] context for McCulloch’s claim;” but that context — i.e., the existence and availability of health care benefits for this treatment for this patient — was insufficient to form a basis for preemption.

Finally, the Second Circuit concluded that, at least under the facts of this case, an insurer or third-party administrator’s oral promise to pay medical providers at specific rates for specific treatments can support an “independent legal duty” that arises not from an ERISA plan, but from “freestanding state law.”

This case has important positive implications for medical providers seeking to assert state law claims against ERISA-governed health care payers and their third-party administrators. For instance, it affirms:

  • Medical providers can sue health care payers in the providers’ own capacity seeking a specific amount of payment for treatments rendered, as long as the payment amount can be derived from a source separate and apart from ERISA plans;
  • A state law claim can evade ERISA’s preemptive scope, even where the ERISA plan provides “context” for a provider’s claim. The mere fact that an ERISA plan exists, or that it brought the provider and the payer together, is insufficient to demonstrate complete preemption; and
  • Oral promises made by insurers during the insurance verification process can, in some instances, form the basis for a medical provider’s state law claim (in this case, promissory estoppel). Consequently, we recommend that medical providers keep detailed accounts of their communications with health care payers during the insurance verification process to strengthen these types of claims, should a payment dispute arise.

On the other hand, the decision affirms the power of an anti-assignment clause in an ERISA plan document to preclude providers from asserting ERISA claims, standing in their patients’ shoes. While that holding worked to McCulloch’s advantage here, in other contexts it could undermine medical providers’ ability to avail themselves of ERISA’s protections and proceed with litigation against health care payers.

Arent Fox’s ERISA group continues to monitor developments in this area. If you have any questions, please contact Caroline Turner English, David Greenberg, Emily Baver Slavin, or the Arent Fox professional who usually handles your matters.

*This article was previously published by Law360.