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November 01, 2005
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'Children's Hospital Corp. v. Kindercare Learning Centers': last tango with ERISA
by: John D. Hanify
Consider the following case, Children's Hospital Corp. v. Kindercare Learning Centers, Inc., et al.:
A newborn was transported from Connecticut to Children's Hospital in Boston with a life-threatening heart condition. The mother of the ill baby was a member of an out-of-state Blue Cross/Blue Shield licensee, and her employer, Kindercare, is a company with child care facilities in various states.
Regence Blue Cross of Oregon, where Kindercare is headquartered, managed her employer's plan and, as such, she was entitled to treatment for herself and her dependents through the national Blue Cross association. The association's BlueCard program joins the Blue Cross affiliates throughout the United States in a network that supports a member's health care in whatever state that member is located. During five months of hospitalization, the staff at Children's Hospital periodically spoke with Regence Blue Cross Oregon to secure authorizations for treatment.
The contractual touchstone of the relationship between Children's and Blue Cross/Blue Shield of Massachusetts is called a Health Services Agreement (HSA). In that contract, Children's agrees to provide Blue Cross members with medical services at various rates negotiated periodically and to provide up-to-date eligibility data. This contract is also the basis upon which Regence Blue Cross in Oregon could expect Children's in Boston to be providing services to one of its members.
After five months of hospitalization and repeated confirmations of authority for treatment, Kindercare discovered that this particular mother had not been paying her premiums. Almost immediately after Kindercare learned of these circumstances, it dispatched a 10-day cancellation notice to the mother and thereafter confirmed the termination of the policy. The hospital was advised that, notwithstanding the string of authorizations, the mother had an unpaid premium problem and was not actually insured.
Children's Hospital brought an action against the insurer and Kindercare for breach of contract and misrepresentation. After Children's filed its lawsuit in Superior Court, the defendants "removed," or attempted to transfer, the case to federal court, contending that ERISA completely preempted the hospital's claims. The defendants contended that the case required a federal forum and that the hospital, in fact, had no remedy under state law.
ERISA, the Employment Retirement Income Security Act of 1974, was intended to protect the integrity of health and benefit plans between employers and employees. As drafted, ERISA sweeps under its aegis any claim that "relates to" an employee benefit plan. It provides that its terms "supersede any and all State laws" that "relate to" an ERISA benefit plan.
The defendants contended that any recovery against the employer or its insurer would necessarily have the effect of imposing additional costs on the underlying "plan," or that in the process of determining the hospital's claim, the language of the plan would be implicated.
In response, Children's Hospital contended that its claims had only to do with either the hospital's contract with the insurer to provide hospital services or the direct representations made by the defendants to the hospital, and not the underlying ERISA benefit plan. Indeed, the hospital had never seen the underlying benefit plan and maintained that its terms were irrelevant to the controversy.
'Avalanche of litigation'
Variants of this ERISA preemption defense have resulted in "an avalanche of litigation in the lower [federal] courts" (DeBuonov NYSA, 520 US 806, 809 n.1) reflecting, in one federal judge's view, "an overzealous readiness in the federal courts to bar all state-law claims which even smell of ERISA under the broad umbrella of preemption …" (Jones dissenting, Cromwell 944 F2 1279)
These cases have heretofore turned on an evolving interpretation of what "relates to" an ERISA plan. The broader the application of the term "relates to," the more evident it has become that almost any incidental relationship to an ERISA plan can frustrate a worthy state law claim.
In the Children's Hospital case, U.S. District Court Judge Patti B. Saris in Boston dealt directly with this question. She found that ERISA preemption was operative only when a party could have brought any of its state law claims under section 502 of ERISA and where no other independent legal duty supported any such claim.
Section 502 speaks to claims by individuals arising from denials of coverage under an ERISA-regulated employee benefit plan. The hospital's claim was not brought in the name of an individual, but was based upon a duty owed to it directly by defendants for intentionally or negligently misrepresenting the existence of coverage. Judge Saris found that the hospital's claims could not have been brought under section 502 of ERISA and that the case should be sent back to state court.
That decision appears to represent the evolved consensus now among federal courts on the efficacy of this defense in circumstances where contracts or other common law duties affect the rights of insurers and providers.
Not long after Judge Saris' decision in the Children's Hospital case, her colleague U.S. District Court Chief Judge William G. Young issued a lengthy decision on June 16, 2005 that comprehensively evaluates the state of the law with respect to ERISA preemption.
In Miara v. First Allmerica Financial Life Insurance Company, et al., the owner and employee of a business enterprise sued the insurance professional and insurance company that promoted a particular form of defined benefit plan. The promotion was allegedly accompanied by representations as to the level of benefits that would be provided under the plan. These benefits were apparently far more limited than what was represented in the salesmanship leading up to the establishment of the plan.
After a comprehensive review of the law in the federal circuits, Chief Judge Young endorsed Saris' analysis of the scope of the term "relate to" and concluded that none of the plaintiff's state law claims "related sufficiently" to any ERISA plan so as to warrant preemption.
Young also recognized that when cases in this posture are sent back to state court, there is effectively no appeal from the order of remand. Having catalogued the decisional law supporting his and Saris' analysis, he nevertheless determined to certify the question to the 1st U.S. Circuit Court of Appeals for a conclusive determination of the issue.
Heyday is over
The great problem with this species of ERISA defense is that its unbridled application would, and sometimes did, leave health care providers without any remedy for the damages caused by insurers or employers in failing to pay claims.
When dealing with a state law regulating how much hospitals could charge for services, one court observed that the argument that "because this regulation affects pension plans in their dealings with hospitals by increasing their costs of doing business, it must be found preempted, proves altogether too much …"
The heyday of ERISA defenses is clearly over. This evolved and more conservative view of ERISA preemption may also hasten the further state regulation of insurance practices that promote the more efficient payment of claims since such regulation is not likely to be treated as preempted by ERISA.
John D. Hanify is director and a shareholder of Hanify & King, and oversees the firm's litigation practice. He represents Children's Hospital in the case currently pending in the Superior Court against Kindercare, Blue Cross/Blue Shield of Massachusetts and Regence Blue Cross Blue Shield of Oregon.
