Fifth Circuit Court Reverses Earlier ERISA Preemption Ruling

December 18, 2002 ( - The Employee Retirement Income Security Act of 1974 (ERISA) does not preempt a Texas law calling for independent review of health maintenance organizations (HMO), the Fifth Circuit Court of Appeals has ruled.

The decision, a review of Corporate Health Insurance Inc v Texas Department of Insurance, represents a reversal of an  earlier Fifth Circuit court ruling  that found ERISA preempted a provision of the Texas Health Care Liability Act, which called for independent review of HMO decisions.

On remand from the US Supreme Court, the two-judge quorum, per curiam opinion found the Texas law regulates insurance, “saving” it from ERISA preemption.  

“We hold that the [independent review] provisions of the Texas statute are not preempted by ERISA because they are within the saving clause of ERISA and do not offer an additional remedy in conflict with ERISA’s exclusive remedy,” the court said.

The review relied on the Supreme Court’s  Rush Prudential HMO Inc v Moran  decision, which said an Illinois law establishing a review of HMO decisions was not preempted by ERISA since it was a law regulating insurance.

Although the appeals court found that it was compelled under the Rush decision to find ERISA does not preempt the Texas law; the court pointed out that the Supreme Court says in Rush that ERISA’s savings clause does not apply to self-funded ERISA plans.

“Because self-funded ERISA plans are not covered by ERISA’s saving clause, ERISA preempts any application of the [independent review] provisions to self-funded plans,” the court stated.

Requesting Review

The remand from the Supreme Court came after the Texas Department of Insurance had petitioned for a panel rehearing of the Fifth Circuit’s original ruling on the independent review provision, pointing to an earlier Supreme Court decision in  Pegram v Hedrich , which said decisions by HMO physicians involving a determination of both a participant’s eligibility for treatment and the appropriate treatment were not fiduciary acts under ERISA.

In its argument the Department of Insurance said the appeals court had “factually misunderstood” the provision and that the Supreme Court’s decision in Pegram “cast doubt” on the appeals court ruling.

The Fifth Circuit denied the petition, stating it did not read the Pegram decision “to entail that every conceivable state law claim survives preemption so long as it is based on a mixed question of eligibility and treatment.”

Additionally, the circuit court noted that the independent review law was preempted by ERISA because the law required HMOs “to pay for treatment that the [independent review organization] mandates and in doing so substitutes the medical judgment of a third party physician for the HMO’s, or treating physician’s, judgment as to medical necessity.”

However, four days after handing down a decision in the Rush case, the Supreme Court adjourned and remanded the Fifth Circuit’s ruling.