Serbonian Bog – re the enactment of ERISA in 1974 by Congress

In 1974 Congress enacted ERISA to “promote the interest of employees and their beneficiaries in employee benefit plans.” Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 90. Spurred on by the Studebaker plant shutdown in 1963, which caused approximately 4,400 workers to lose their pensions, ERISA was specifically enacted to address, and aid the apparent insecurity of workers’ vested pension funds. As designed, ERISA was supposed to protect plan participants from negligent or malfeasant plan managers.

Two types of benefit plans were seen to be in need of protection: 1) pension and 2) welfare. Substantially different policy concerns inspired the reforms in each area.

Inherent in pension plans, intended to provide retirement income through contributions from both the employer and the employee, was the substantial risk for mismanagement and underfunding. Accordingly, Title 1 of ERISA imposed comprehensive reporting, disclosure, vesting, minimum funding and fiduciary duty requirements. (This paper will not discuss pension plans except when necessary for purposes of comparison.)

Welfare plans, on the other hand, operate on a “pay as you go” basis and generally do not entail long-term financial commitments. The vesting and minimum funding requirements of pension plans were not extended to welfare benefit plans. Accordingly, Welfare benefit plans that are governed by ERISA are subject to ERISA’s procedural rules, i.e. reporting, disclosure, fiduciary and remedial rules, but are exempt from the vesting and funding requirements ERISA mandates for pension plans. In fact, “ERISA does not mandate that employers provide any particular benefits, and does not itself proscribe discrimination in the provision of benefits.”

Even though it would initially appear that welfare plans contain less restrictions than pension plans, both are subject to the broad preemption mandated by §514(a) which “shall supersede any and all State laws insofar as they may now or hereafter related to any employee benefit plan.” Although welfare benefit plans are subject to an exception for state laws regulating insurance, not much has gotten beyond the giant reach of ERISA’s preemptive grasp.

Congress’ intent behind §514(a) preemption was to ensure that plan sponsors would be subject to uniform law. Ingersoll-Rand, (1990) 498 U.S. 133. Nevertheless, in a line of Supreme Court cases, reaching to the present day, ERISA generally, and §514(a) in particular has become an impenetrable shield. In fact, ERISA has created a “regulatory vacuum” in which virtually all state laws are preempted and almost no federal substitutes have been provided. While allegedly providing an exception for state laws that govern insurance, few, if any such laws, have passed ERISA’s draconian preemption provisions.


Section 502 contains two remedies for plan participants who have been personally injured by a welfare benefit plan. §502(a) (1) (B) allows the participant to bring a civil action to recover benefits, enforce or clarify his/her rights. Section 502(a) (3) allows a participant to seek equitable remedies, such as an injunction to redress violations of an ERISA plan or enforce any provisions of ERISA or the plan.

This leaves plan participants with almost no remedies. §502(a) (1) (B) only allows a participant to obtain the contractual benefits owed him even if the benefits have been intentionally withheld in bad faith. And few, if any, plan participants have the resources to seek equitable remedies. This is particularly true in the context of a denial of healthcare benefits. By the time the patient obtains an equitable remedy, he or she could be dead.

Today, the effect of ERISA’s preemptive reach and its limited remedies has been to insulate HMO’s from liability for the most egregious acts against plan participants. The fact that under ERISA, an egregiously and wrongfully injured plan participant cannot hope to obtain a jury trial, extracontractual, compensatory (including contingency fees) or punitive damages create an enormous incentive for HMO’s to withhold care. Even if they were adjudged wrong, under ERISA, all they would be on the hook for is the cost of the care itself, and in some instances, some minimal attorney’s fees.


Before turning to a review of the cases, it is important to understand the emergence and importance of HMO’s to the health care of most Americans. When ERISA was enacted, HMO’s did not even exist. Back in the 1960’s, most health care was delivered as “fee for service.” The medical care was delivered before the insurance battle was fought. If the insurer later refused to pay for the medical care and the participant’s plan was covered by ERISA, the participant could bring a suit under ERISA §502(a) to the recover the benefits due under the plan. Because in a fee for service context, the physician is motivated to provide more, not less, care as long as payment is forthcoming, the patient usually received the prescribed care.

Beginning in the 1960’s, a new model for healthcare was developed, primarily by insurers who thought they were paying out too much in benefits. The concept, known as managed care, includes HMOs. An HMO makes money by withholding care, unlike the previous fee for service care, because it receives a flat fee for each enrolled patient. In other words, whether or not the participant even uses its services, the HMO will receive a set fee for each enrollee. The more of that fee that is expended on medical care, the less the HMO gets to keep as profit.

Today approximately 75% of Americans who are insured through their workplaces receive their health care through some kind of “managed care” plan including HMO’s. Difelice v. Aetna U.S.Healthcare, (2003) 346 F.3d 442, 464. Care is either approved or denied before any procedure actually takes place by the “utilization review board.” “Because these denials now take place before the treatment itself, the effect is a systematic deterioration in the quality of treatment participants receive, all oxymoronically occasioned by a statute ‘designed to promote the interests of employees and their beneficiaries in employee benefit plans.” Id. at 464-464, quoting Shaw, supra, at 465.

Despite what at least one jurist has referred to as a “Serbonian bog,” in reference to ERISA, numerous lower courts have struggled to maintain a sense of equity by identifying exceptions to §514 preemption, such as that for medical malpractice preemption, and to draw distinctions, under the remedial scope of §502 between eligibility decisions, which are preempted and medical decisions, which are not. Numerous courts have sadly acknowledged the inequities brought about by ERISA preemption and its limited remedies. Bast v. Prudential Ins. Co., 150 F.3d 1003, 1005; [“the Basts are left without a remedy.”]; Cannon v. Group Health Serv. Of Okla., Inc., 77 F.3d 1270-1271 (10 th cir.1996) [[“We] are moved by the tragic circumstances of this case…[but] conclude the law gives us no choice”]; Corcoran v. United Healthcare, Inc., 965 F.2d 1321,1338 (5 th Cir. 1992) [“The result ERISA compels us to reach means the Corcorans have no remedy. . .”]; Andrews-Clarke v. Travelers Ins. Co., 984 F. Supp.49, 52-52 (D.Mass.1997) [“The tragic events set forth in Diane Andrews-Clarke’s complaint cry out for relief. . . . Nevertheless, this Court had . . . to slam the courthouse doors in her face and leave her without any remedy.”]; Florence Nightingale Nursing Serv. Inc. v. Blue Cross & Blue Shield of Alabama, 832 F. Supp. 1456m1457 (N.D. Ala. 1993) aff’d, 41 F.3d 1476 (11 th Cir. 1995) [“A hyperbolic wag is reputed to have said that E.R.I.S.A. stands for ‘Everything Ridiculous Imagined Since Adam.’ . . . .[This court is willing to believe that ERISA has lurking somewhere within it a redeeming feature. However, this is not the case in which to find it.].

In his strongly worded concurring opinion in DiFelice v. Aetna U.S. Healthcare, supra,

346 F.3d 442, Circuit Judge Becker wrote separately to:

“add my voice to the rising judicial chorus urging that Congress and the Supreme Court revisit what is an unjust and increasingly tangled ERISA regime. . . .Indeed, existing ERISA jurisprudence creates a monetary incentive for HMOs to mistreat those beneficiaries who are often in the throes of medical crises and entirely unable to assert what meager rights any possess. . . . . In many areas of law contingency fee structures are used to overcome a litigant’s initial impecunoiosity. But any possibility of using contingency fees in this context is undermined by ERISA preemption. . . .”

See Also, Cicio v. Does, 321 F.3d 83.107 (2d Cir.2003) (Calabresi, J., dissenting) [“[I}t is not too late for the Supreme Court to retrace its Trail of Error and start over from the beginning or for the Congress to wipe the slate clean.”].

Given this change in the way American’s receive their healthcare, the rise of managed care and HMO’s and the demise of “fee for service” plans, ERISA preemption creates enormous inequities, actually rewarding insurers for providing bad care. In an HMO system, a physician’s financial interests lies in providing less, not more, care. It is against this background that the effects of ERISA preemption have been devastating to injured insureds.


A Serbonian bog is a mess from which there is no way of extricating oneself-legally it is a term that has usually been reserved for the often difficult task of parsing liability in “accidental” death policies.

As stated above, the body of case law dealing with ERISA preemption is incredibly tortured and convoluted, and many of the results are difficult to reconcile.

Pilot Life Ins. Co. v. Dedeaux (1987) 107 S.Ct. 1549 (1987) was one of the first major cases defining the scope of Section 1144(a) and ERISA’s saving clause which exempted from the scope of preemption those state laws whose purpose was to regulate insurance. Pilot Life took a harsh stance against the saving clause, defining the saving clause’s “regulates insurance” very narrowly and striking down a common law bad faith claim. Since Pilot Life, however, there have been several key decisions that have chipped away at Pilot Life‘s holding, potentially widening the scope of ERISA’s saving clause.

New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Ins. Co. (1995)

The first important case to limit the chokehold of ERISA preemption was New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Ins. Co.,514 U.S.645,654-655 (1995). In Travelers the U.S. Supreme Court held that, in the field of health care, a subject of traditional state regulation, there is no ERISA preemption without clear manifestation of congressional purpose.

In Pegram v. Herdrich, 530 U.S. 211, (2000) the Supreme Court examined the question of whether, in the treatment context, decisions made by an HMO acting through its physician employees are fiduciary acts within the means of ERISA. The Court stated that “[b]ased on our understanding . . . we think Congress did not intend . . . any . . . HMO to be treated as a fiduciary to the extent that it makes mixed eligibility decisions through its physicians.” The Court held “that mixed eligibility decisions by HMO physicians are not fiduciary decisions under ERISA.” Id. at 2155,2158. Of course, determining which decisions are “pure eligibility” decisions versus those that are pure “treatment decisions” casts us once again into the Serbonian bog. As the Court acknowledged, “These decisions are often practically inextricable. . . as they are in countless medical administrative decisions every day.” Id. at 2154.

Dishman v. Unum Life Ins. Co. of America (9 th Cir. 2001)

In Dishman v. Unum Life Ins. Co. of America, 269 F.3d 974, 984 (9 th Cir. 2001), the Ninth Circuit addressed whether a state law with only a tenuous connection to a covered plan may still be preempted by ERISA. Although Dishman is a disability, and not an HMO case, its posture is informative.

The Dishman plaintiff sued UNUM, the insurer that administered his employer’s long-term disability plan, after UNUM terminated his disability benefits. He brought suit under California common law for an invasion of privacy due to the “unreasonably intrusive” nature of its investigation into his claim. The investigative firms UNUM hired elicited personal information about the plaintiff by making false representations to his employer, neighbors, and acquaintances. Additionally, the firms failed to acknowledge that he did not work for compensation for a certain company. UNUM did not argue that the plaintiff failed to state a claim against it under California law, but rather that ERISA barred the plaintiff’s claim because it related to benefits obtained through his employer’s long-term disability plan. The Ninth Circuit rejected this argument and found the plaintiff’s claim was not preempted by ERISA.

The Ninth Circuit focused on Congress’ intent in passing the preemption clause stating that it was to allow for national uniformity in the administration of employee benefit plans. Quoting the United State Supreme Court’s decision in New York Conference of Blue Cross & Blue Shield Plans v. Travelers Ins. Co, the Ninth Circuit held that “[p]re-emption does not occur… if the state law has only a tenuous, remote, or peripheral connection with covered plans, as is the case with many laws of general applicability.” Dishman, 269 F.3d at 984. The Court determined that it would not further Congress’ intent to grant ERISA administrators “blanket immunity from garden variety torts which only peripherally impact daily plan administration” and held that the state invasion of privacy law under which the Dishman plaintiff brought suit was not preempted for this reason.

The Court focused on the fact that the plaintiff’s state law tort cause of action against UNUM would remain regardless of whether or not UNUM ultimately paid his claim for benefits. This, the Court held, was evidence that the state law under which the plaintiff brought his tort claim was sufficiently remote from his claim for benefits to be not ERISA preempted.

Pilot Life and Dishman, taken together, create a contradiction: if a state law is somewhat general and unrelated to the administration of benefits it will be preempted per Pilot Life, but if the state law is very general it will not be preempted per Dishman. In failing to addresses these Pilot Life issues, Dishman fails to address just how unrelated to the administration of employee benefits a state law must be in order to escape ERISA preemption. However, Dishman does make clear that causes of action based in state invasion of privacy laws bear too tenuous a relationship to the handling of employee benefits claims for ERISA preemption to occur.

Rush Prudential HMO, Inc., v. Moran (2002)

In Rush Prudential HMO, Inc., v. Moran, 536 U.S. 355, 373 (2002), the U.S. Supreme Court was asked to decide whether an Illinois statute requiring HMOs to provide an independent review of disputes between a primary care physician and an HMO, and to cover services that were deemed medically necessary by the independent reviewer, was preempted by ERISA or whether it “regulated insurance” and therefore fell within ERISA’s saving clause. The Court, by a narrow 5-4 margin, determined that the Illinois statute did in fact “regulate insurance” and therefore fell within ERISA’s saving clause. This decision is significant, not only because it explicitly states that ERISA’s saving clause can apply to state laws regulating HMOs, but also because it represents a marked departure from the expansiveness of the savings clause first espoused in Pilot Life.

In determining whether the Illinois statute in question was saved from preemption by the saving clause, the Court first relied on its decision in Metropolitan Life Ins. Co. v. Massachusetts, 471 U.S. 724 (1985), and applied a “commonsense view” to whether the Illinois statute in question was “specifically directed toward the insurance industry. The Court concluded that the statute was so directed. The Court clearly stated that the fact that the statute regulated HMOs rather than traditional insurers did not alter this conclusion. As the Court stated, HMOs “have taken over much business formerly performed by traditional indemnity insurers, and . . . are almost universally regulated as insurers under state law. That HMOs are not traditional ‘indemnity’ insurers is no matter.” Rush Prudential, 536 U.S. at 372-73.

After applying its common sense test, the Court then applied the three-pronged test that has guided ERISA preemption analysis for decades prior to the Court’s 2003 Kentucky Association of Health Plans, Inc. v. Miller, 123 S.Ct. 1471, 1471 (2003), decision. This three-pronged test was borrowed from cases that interpreted whether a certain practice constituted the business of insurance under certain sections of the McCarran-Ferguson Act. The three factors to be considered were, “first, whether the practice has the effect of transferring or spreading a policyholder’s risk; second, whether the practice is an integral part of the policy relationship between the insurer and the insured; and third, whether the practice is limited to entities within the insurance industry.” Union Labor Life Ins. Co. v. Pireno, 458 U.S. 119, 129 (1982).

The Court then relied on its recent holding in UNUM Life Ins. Co. v. Ward, 526 U.S. 358 (1999) and held that a practice need not satisfy all three of these factors in order to be saved from preemption. While the Court “left open” whether the review mandated by the Illinois law spread a policyholder’s risk, it determined that the second and third factor were “clearly satisfied” by the Illinois statute. Rush, 536 U.S. at 373. The independent review requirement regulated an “integral part of the policy relationship between the insurer and insured.” Id. Furthermore, the law was aimed at a practice “limited to entities within the insurance industry.” HMO contracts, the Court held, are contracts for insurance, and the law regulates application of HMO contracts and provides a system for reviewing claim denials. Satisfying these two prongs, the Court held, was sufficient to save the statute from ERISA preemption.

Cicio v. Does , (2003)

In Cicio v. Does, 321 F.3d 83 (2 nd Cir. 2003), the Second Circuit held that state law medical malpractices claims brought over medical decisions made during a managed care organization’s or health insurer’s prospective utilization review are not ERISA-preempted.

The crux of the Court’s decision hinged on its determination that prospective utilization reviews are “mixed eligibility and treatment” decisions as first defined in Pegram v. Herdrich, 530 U.S. 211, 229 (2000). The Court defined the prospective utilization reviews at issue in its case as advance third-party reviews of the necessity of medical care. Cicio, 321 F.3d, at 98. The Court then held that these reviews are “quasi-medical in nature,” because they require evaluating data obtained in traditional face-to-face medical encounters before determining whether treatment is necessary. Id. The Court also held that these decisions require both an exercise of medical judgment and contract interpretation and concluded, based on congressional intent and Pegramsupra, that state law malpractice actions based on such mixed decisions are not preempted by ERISA if the action goes to a flawed medical judgment. Id, at 102-03.

Cicio represents a departure from previous ERISA preemption case law in which courts made a distinction between “quality of care” decisions and “benefits administration” decisions in determining whether a state law was preempted. The Court explicitly stated that “the mere presence of an administrative component in a health care decision no longer has determinative significance for purposes of preemption analysis when the decision also has a medical component.” Id., at 103.

Kentucky Ass’n of Health Plans, Inc., et al., v. Miller – (2003)

While Rush and its relatively expansive view of the saving clause caused quite a stir when it was first decided, its importance in this area of law was quickly supplanted by the U.S. Supreme Court’s decision in Kentucky Association of Health Plans, Inc. v. Miller .

Miller involved a Kentucky statute dubbed the “Any Willing Provider” statute (“AWP”). The AWP statute provided that “[a] health insurer shall not discriminate against any provider who is located within the geographic coverage area of the health benefit plan and who is willing to meet the terms and conditions for participation established by the health insurer,” and that any “health benefit plan that includes chiropractic benefits shall. . . [p]ermit any licensed chiropractor who agrees to abide by the terms. . . and standards of quality of the health benefit plan to serve as a participating primary chiropractic provider to any person covered by the plan.” Miller, 123 S.Ct. 1471, 1471 (2003). The Supreme Court deemed the AWP statute not ERISA-preempted. While the Supreme Court’s result in this case is yet another move by the Court towards more leniency in terms of the saving clause, and away from its earlier harsh ruling in Pilot LifeMiller is most significant because of the sea change the Court took in its decision regarding the standard for ERISA preemption analysis.

In Miller, the Supreme Court streamlined its ERISA preemption analysis considerably. It did not overrule any of its previous decisions, but it explicitly stated that it was making a “clean break” from the ERISA preemption analysis methods it, and other courts, used in prior decisions. The Miller Court held that the 3-pronged McCarran-Ferguson test it used in Rush and in other prior case had “misdirected attention, failed to provide clear guidance to lower federal courts, and . . . added little to the relevant analysis.” Id. These McCarran-Ferguson factors, the Court held, were developed in cases characterizing conduct by private actors; ERISA preemption, in contrast, dealt with state laws. The Miller Court therefore developed a new set of guidelines to test whether a state law regulates insurance that has guided all ERISA-preemption jurisprudence since Miller was decided. In so doing, the Miller Court pared down the three-factor McCarran-Ferguson test into two requirements: 1. The state law must be specifically directed toward entities engaged in insurance; and 2. The state law must substantially affect the risk pooling arrangement between the insurer and the insured.

The Miller Court held that the Kentucky AWP statute satisfied its new two-pronged test. The AWP statute was specifically directed towards entities engaged in insurance because it prevented insurers from discriminating against willing providers, and hence imposed conditions “on the right to engage in the business of insurance.” Id. Additionally, the statute substantially affected the risk pooling arrangement between the insured and insurer because it expanded the total number of providers from whom insureds can receive health services, and therefore altered “the scope of permissible bargains between insurers and insureds.”

Miller’s Impact

Miller has had considerable impact on the ERISA-preemption landscape. Courts deciding ERISA-preemption cases now must use the Miller two-pronged test to determine if a state law is saved from preemption instead of the three-pronged test they used for years. By reducing the number of hurdles a state law must clear in order to escape preemption, the Miller decision implies that the Court might now be more generous with its application of ERISA’s saving clause than it has been in the past. Miller was decided less than one year ago, however, so whether or not courts actually take this more generous approach remains to be seen.

Aetna Health Inc. v. Davila/ Cigna HealthCare of Texas Inc. (2004)

Currently before the United States Supreme Court and scheduled for oral argument on March 23, 2004, are the cases of Aetna Health Inc. v. Davila, No. 021845 and Cigna HealthCare of Texas Inc.v. Calad, No. 03-83. Both cases involve wrongful benefit denials by HMOs.

The underlying facts of both cases are horrific. Davila is a post-polio patient who suffers from diabetes and arthritis. He received Aetna HMO coverage through his employer. Davila’s primary care physician prescribed Vioxx for his arthritis pain because Vioxx has a lower rate of gastrointestinal toxicity, i.e., bleeding, ulceration, perforation of the stomach, etc., than do the other drugs on Aetna’s formulary. Before agreeing to fill the Vioxx prescription, Aetna insisted that Davila enter its “step program” and try two different medications first. Only if he suffered side effects from these medications, would Aetna agree to fill the original prescription for Vioxx. After three weeks on the first of these drugs, Davila was rushed to the hospital suffering from bleeding ulcers which caused a near heart attack and internal bleeding. He required seven units of blood, was in the critical care unit for five days and is now unable to take any pain medications that are absorbed through his stomach. Davila sued in state court under the Texas Healthcare Liability Act (THCLA). Aetna removed to federal court citing ERISA preemption.

Ruby Calad was a member of CIGNA HealthCare of Texas, Inc., a Texas HMO. Calad underwent a hysterectomy with rectal, bladder, and vaginal repair. CIGNA discharged Calad one day after her surgery even though the CIGNA doctor who performed the surgery recommended a longer stay. Calad suffered complications and had to return to the emergency room a few days later. She sued under the THCLA alleging that CIGNA had failed to use ordinary care in making its medical necessity decisions, CIGNA’s system made substandard care more likely and CIGNA acted negligently when it made its medical necessity decisions. CIGNA removed based on ERISA preemption. Calad also sued the HMO for breach of fiduciary duty.

The Fifth Circuit, relying on Pegram, supra, held that both plaintiffs’ state-court claims against their HMOs, brought under the state medical malpractice statute, were mixed eligibility and treatment decisions falling outside ERISA benefits recovery provisions, and thus not completely preempted by and not removable on the basis of that provision. The HMOs appealed to the Supreme Court.

With these cases the United States Supreme Court has another opportunity to “revisit what is an unjust and increasingly tangled ERISA regime. . . . The vital thing, however, is that either Congress or the Court act quickly, because the current situation is plainly untenable. Lower courts are routinely forced to dismiss entirely justified complaints by plan participants who have been grievously injured by HMOs and plan sponsors, all because of ERISA. . . .” DeFelice v. Aetna U.S. Healthcare (2003) 346 F.3d 442, 466.


Even this very short overview of the impact of ERISA preemption on medicine as it is practiced in the context of managed care, and HMOs in particular, makes it clear that change in this area of the law could be coming. Hopefully, with its decision in Davila, the Supreme Court will take definitive steps to extricate plan participants from ERISA’s Serbonian Bog. It is imperative for the Supreme Court to put an end to the impenetrable barrier to justice that ERISA has erected for plan participants who have been grievously injured by HMOs and disability insurers.