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CAUSE NO. 96-5690-A

IRENE P. HENDERSON, Individually and on    )    IN THE DISTRICT COURT
behalf of the Estate of RONALD HENDERSON,  )
Deceased, LORA MASHAW, and TRACEY  )
GRAVES,                            )
                                   )
v.                                 )
                                   )
KAISER FOUNDATION HEALTH PLAN OF   )
TEXAS, Individually and d/b/a KAISER  )    14TH JUDICIAL DISTRICT
PERMANENTE, PERMANENTE MEDICAL     )
ASSOCIATION OF TEXAS, Individually and     )
d/b/a KAISER PERMANENTE, KAISER    )
FOUNDATION HEALTH PLAN, INC.,      )
Individually and d/b/a KAISER PERMANENTE,  )
KAISER FOUNDATION HOSPITALS,       )
Individually and d/b/a KAISER PERMANENTE,  )
DEWEY W. CHIN, M.D., Individually and )
d/b/a DEWEY W. CHIN, M.D., LAURIE  )
CROWE, M.D., Individually and d/b/a LAURIE )
CROWE, M.D., DONALD HOLCOMB, M.D., )
Individually and d/b/a DONALD HOLCOMB,     )
M.D., SOON ONG, M.D., Individually and     )
d/b/a SOON ONG, M.D., JOLENE WESLEY,  )
R.N., CONNIE HUSSAIN, R.N., and DONNA )
MCELRAVY, M.D.                     )  DALLAS COUNTY, TEXAS
 
 
 
 

SECRETARY OF LABOR'S  BRIEF AS AMICUS CURIAE WITH RESPECT TO DEFENDANTS KAISER FOUNDATION HEALTH PLAN OF TEXAS, KAISER FOUNDATION  HEALTH PLAN, INC., AND KAISER FOUNDATION HOSPITAL'S MOTION FOR PARTIAL SUMMARY JUDGMENT

                        TABLE OF CONTENTS
 

TABLE OF AUTHORITIES . . . . . . . . . . . . . . . . . . . . .iii

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . .1

STATEMENT OF INTEREST OF AMICUS CURIAE . . . . . . . . . . . . .1

ISSUES ADDRESSED . . . . . . . . . . . . . . . . . . . . . . . .2

STATEMENT OF FACTS AND PROCEEDINGS . . . . . . . . . . . . . . .2

ARGUMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . .6

I.   THE RECOGNITION PLAN IS AN ERISA PLAN AND KAISER IS A 
MEDICAL SERVICES PROVIDER TO THE PLAN. . . . . . . . . . . . . .6

II.  ERISA   514(a) DOES NOT PREEMPT STATE LAW IN FIELDS OF TRADITIONAL STATE REGULATION, SUCH AS THE COMMON LAW OF NEGLIGENCE AND WRONGFUL DEATH STATUTES, ABSENT A SHOWING THAT PREEMPTION WAS THE CLEAR AND MANIFEST PURPOSE OF ERISA. . 11

     A.   ANALYSIS OF WHETHER A STATE LAW IS PREEMPTED BY ERISA
      514(a) REQUIRES LOOKING BEYOND THE TERM "RELATE TO" AND
     ANALYZING THE STATE LAW THROUGH USE OF THE PRESUMPTIONS
     SET OUT IN TRAVELERS. . . . . . . . . . . . . . . . . . . 11

     B.   BECAUSE THE CLAIMS IN THIS CASE ARE BASED UPON LAWS
     RELATING TO TRADITIONAL FIELDS OF STATE REGULATION, THEY
     CARRY THE PRESUMPTION THAT THE CLAIMS ARE NOT PREEMPTED . 13

     C.   ERISA  514(a) DOES NOT PREEMPT THE STATE LAW CLAIMS
     AGAINST THE KAISER DEFENDANTS AS THEY DO NOT SUBJECT THEM
     TO CONFLICTING REGULATION IN THEIR ACTIONS INVOLVING PLAN
     ADMINISTRATION  . . . . . . . . . . . . . . . . . . . . . 15

     D.   THE KAISER DEFENDANTS HAVE NOT DEMONSTRATED THAT IT
     WAS THE CLEAR AND MANIFEST PURPOSE OF CONGRESS IN
     ENACTING ERISA  514(a) TO PREEMPT STATE ACTION INVOLVING
     MIS-MANAGED CARE. . . . . . . . . . . . . . . . . . . . . 18

CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . 28

APPENDIX A - Excerpt from Kaiser Permanente Member Handbook, Spring 1995
                       TABLE OF AUTHORITIES

                          FEDERAL CASES

            Aetna Insurance Co. v. Borges,
            869 F.2d 142 (2nd Cir.), cert. denied, 493 U.S. 811 (1989) 16

            Altieri v. Cigna Dental Health,
            753 F. Supp. 61 (D. Conn. 1990)  . . . 27

            Anderson v. Humana,
            24 F.3d 889 (7th Cir. 1994)  . . . . . 19

            Burke v. Smithkline Bio-Science Lab,
            858 F. Supp. 1181 (M.D. Fla. 1994) . . 25

            Butler v. Wu,
            853 F. Supp. 125 (D.N.J. 1994) . . 25, 27

            California Division of Labor Standards Enforcement v.
            Dillingham Construction,
             117 S. Ct. 832 (1997) . . . . . . . . 13

            De Buono v. NYSA-ILA Medical and Clinical Services Fund, U.S. ,
            117 S. Ct. 1747, 138 L. Ed. 2d 21 (1977) 12, 14

            Chaghervand v. CareFirst,
            909 F. Supp. 304 (D.Md. 1995). . . . . 25

            Corcoran v. United Healthcare, Inc.,
            965 F.2d 1321 (5th Cir. 1992). . . .23-24

            Dearmas v. Av-Med Inc.,
            865 F. Supp. 816 (S.D. Fla. 1994). . . 25

            Donovan v. Dillingham,
            688 F.2d 1367 (11th Cir. 1982) . . . . 15

            Dukes v. U.S. Healthcare, Inc.,
            57 F.3d 350 (3d Cir. 1995) . . . . . . 21

            Elsesser v. Hospital of Phila. College of Osteopathic Medicine, Parkview Division,
            802 F. Supp. 1286 (E.D. Pa 1992) . . . 25

            Fort Halifax Packing Co., Inc. v. Coyne,
            482 U.S. 1 (1987)  . . . . . . . . . . 16

            Haas v. Group Health Plan,
            875 F. Supp. 544 (S.D. Ill. 1994). . . 25

            Independence HMO v. Smith,
            733 F. Supp. 983 (E.D. Pa. 1990) . .24-25

            Jass v. Prudential Health Care Plan Inc.,
            88 F.3d 1482 (7th Cir. 1996) . . . .26-27

            Kearney v. U.S. Healthcare, Inc.,
            859 F. Supp. 182 (E.D. Pa. 1994) . 25, 27

            Kohn v. Delaware Valley HMO, Inc.,
            No. 91-275, 1992 U.S. Dist. LEXIS 1092 (E.D. Pa. Feb. 5, 1992)25

            Lancaster v. Kaiser Foundation Health Plan of Mid-Atlantic States, Inc.,
            958 F. Supp. 1137 (E.D. Va. 1997)  .19-21

            Memorial Hospital System v. Northbrook Life Insurance Co.,
            904 F.2d 236 (5th Cir. 1990) . . . . .7-9

            Meredith v. Time Insurance Co., 980 F.2d 352 (5th Cir. 1993) 7

            New York State Conference of Blue Cross and Blue Shield Plans v.
            Travelers Insurance Co.,
            115 S. Ct. 1671 (1995) . . . . . . .11-13

            Pacificare Inc. v. Burrage,
            59 F.3d 51 (10th Cir. 1995)  . . . . . 25

            Paterno v. Albuerne,
            855 F. Supp. 1263 (S.D. Fla. 1994) . . 25

            Pilot Life Insurance Co. v. Dedeaux,
            481 U.S. 41 (1987) . . . . . . . . . . 15

            Prudential Health Care Plan, Inc. v. Lewis,
            77 F.3d 493 (10th Cir. 1996) . . . . . 25

            Ricci v. Gooberman,
            840 F. Supp. 316 (D.N.J. 1993) . . . . 25

            Shaw v. Delta Air Lines, Inc.,
            463 U.S. 85 (1983) . . . . . . . . . . 12

            Shea v. Esenstein,
            107 F.3d 625 (8th Cir. 1997) . . . . . 19

            Smith v. HMO Great Lakes,
            852 F. Supp. 669 (N.D. Ill. 1994)  25, 27

            Smith v. Jefferson Pilot Life Insurance, Co.,
            14 F.3d 562 (11th Cir. 1994) . . . . . 16

            Stratton v. Bryant,
            No. 92-CV-3873, 1992 U.S. Dist. LEXIS 18050 (E.D. Pa. Nov. 18, 1992)25

            Stroker v. Rubin,
            No. 94-5563, 1994 U.S. Dist. LEXIS 18379 (E.D. Pa. Dec. 23, 1994) 25, 27

            Taggert Corp. v. Life & Health Benefits Administration, Inc.,
            617 F.2d 1208 (5th Cir.1980), cert. denied, 450 U.S. 1030 (1981) 18

            Tolton v. American Biodyne, Inc.,
            48 F.3d 937 (6th Cir. 1995). . . . . . 27

                           STATE CASES

Dalton v. Peninsula Hospital Ctr,
626 N.Y.S.2d 362 (N.Y. Sup. Ct. 1995). . . . . . . . . . . . . 25

De Genova v. Ansel,
555 A.2d 147 (Pa. Super. Ct. 1988) . . . . . . . . . . . . . . 26

            In re Estate of Frappier v. Wishnov,
            678 So. 2d 884 (Fla. 1996) . . . . 21, 25

            Pappas v. Asbel,
            675 A.2d 711 (Pa. Super. Ct. 1996) . . 25

            Raglin v. HMO Illinois, Inc.,
            595 N.E.2d 153 (Ill. App. Ct. 1992). . 26

            Waddell v. Kaiser Foundation Health Plan of Texas,
            877 S.W.2d 341 (Tex. Ct. App. 1994)11-12, 26

                                     FEDERAL STATUTES

            29 C.F.R.  2510.3-1(j)  . . . . . . . .9

            29 U.S.C. 1001 et seq . . . . . . . .1-2

            29 U.S.C. 1002(1) . . . . . . . . . . .7

            29 U.S.C. 1002(21)(A) . . . . . . . . 17

            29 U.S.C. 1002(16)(A)(i) and (ii) . . 10

            29 U.S.C. 1024  . . . . . . . . . . . 10

            29 U.S.C. 1144(a) (emphasis added)  . 11

                                       INTRODUCTION 

     Alexis S. Herman, Secretary of the United States Department of Labor ("the Secretary") respectfully submits her Brief as Amicus Curiae With Respect to Defendants Kaiser Foundation Health Plan of Texas, Kaiser Foundation Health Plan, Inc., and Kaiser Foundation Hospital's Motion for Partial Summary Judgment. 

              STATEMENT OF INTEREST OF AMICUS CURIAE 

     The Secretary has been charged with the mandate of interpreting and enforcing the provisions of Title I of the Employee Retirement Income Security Act of 1974 ("ERISA"), as amended, 29 U.S.C.  1001 et seq.  The Department of Labor has a strong interest in ensuring that ERISA preemption principles are applied appropriately to ensure that participants of ERISA-covered employee benefit plans are not stripped of rights and remedies under state laws pertaining to the delivery of health care that do not relate to such plans. 

     Currently, there are approximately 148 million Americans, including approximately 9.6 million Texans, whose medical care is paid for through ERISA-covered plans sponsored by employers.   The important issues before the Court are whether ERISA deprives participants of ERISA-covered employee health plans of the protections afforded by the state
law of negligence and wrongful death with respect to the actions of health maintenance
organizations ("HMOs") as providers or arrangers of medical services. 

                         ISSUES ADDRESSED 

1)   What is the ERISA-covered plan in this case? 

2)   Does ERISA  514(a) preempt state common law claims and state wrongful death
remedies for negligence in the provision or arrangement of medical care? 

                STATEMENT OF FACTS AND PROCEEDINGS 

     For the purposes of this amicus brief, the Secretary has assumed the truth of all factual allegations and representations of the parties.  The Secretary's legal arguments are based on that assumption. 

     Recognition International ("Recognition") sponsored an employee benefit plan ("the Recognition Plan") that provided, among other benefits, for basic health care services such as medical, surgical, and hospital care for eligible employees of Recognition.   5, Affidavit of Kate Manzone dated July 3, 1997 ("Manzone Affidavit") (attached as Exhibit C to the
Kaiser defendants' Motion for Partial Summary Judgment).  These benefits were provided through a number of different service providers.  Id. 

     Kaiser Texas and Recognition entered into a Group Medical and Hospital Service Agreement effective January 1, 1995 ("Service Agreement"), whereby Kaiser Texas agreed to arrange for and provide certain medical and hospital services to those employees and their eligible dependent family members who enrolled with Kaiser Texas through the Recognition
Plan.  Manzone Affidavit Ex. A at 1; see  3, 5, Manzone Affidavit.  Under the terms of the Service Agreement, Kaiser Texas arranged for necessary medical and hospital services and other basic health care services.  Manzone Affidavit Ex. A at 1; see  8, Manzone Affidavit.  Kaiser Texas contracted with the Medical Association, who employed the physicians who provided the primary medical care under the Service Agreement, and with Kaiser Hospitals, who in turn contracted with a number of local hospitals in the Dallas, Texas, area for the hospital services provided under the Service Agreement.  

Appendix A. 

Kaiser, Inc., is the parent corporation of Kaiser Texas.  4, Affidavit of Victoria Zatkin dated July 3, 1997 (attached as Exhibit B to the Kaiser defendants' Motion for Partial Summary Judgment).
    

    By January 1995, Ronald Henderson, an employee of Recognition, had enrolled with Kaiser Texas through the Recognition Plan.   5, 7, Manzone Affidavit.  During July and August of 1995, Mr. Henderson received medical treatment and other medical and hospital services under the Service Agreement for chest pain and other cardiac symptomatology. 
V., Plaintiffs' Fourth Amended Original Petition ("Complaint");  V.B., Kaiser defendants' Motion for Partial Summary Judgment.  On August 31, 1995, Mr. Henderson died of arteriosclerotic heart disease.   V, Complaint. 

     The plaintiffs filed the current lawsuit in the 14th Judicial District, Dallas County, Texas, based on negligence and medical malpractice.  Specifically, the plaintiffs' negligence claims that are at issue in this motion are based on the allegations that Kaiser, Inc., and Kaiser Hospitals breached their direct duties of due care in providing adequate and necessary medical treatment for, and Kaiser Texas is vicariously liable for the breach of the duties of due care of others for, failing to: provide adequately trained health care providers for Mr. Henderson, either through the HMO or through outside referrals; provide adequate training for its employees; establish adequate quality assurance and quality control programs, an adequate system of hiring and credentialing of physicians, and a medical care system with continuity of medical treatment for the subscribers under the Service Agreement; adequately supervise the quality of medical care and treatment provided to the subscribers under the Service Agreement; employ unimpaired and/or competent physicians; have adequate policies with respect to the treatment, testing, and/or referral of patients with symptoms and/or conditions like Mr. Henderson; and maintain continuity of care and adequate communication between the health care providers.   Vif-m, o, t, v-w, IXf-n, p, and Xf-j, l-n, p, r, Complaint. 

     The plaintiffs further allege in the claims that are at issue in this motion that Kaiser Hospitals directly breached its duties of due care in providing adequate and necessary medical treatment by entering into financial arrangements that discouraged adequate medical treatment and by creating and fostering an environment that perpetrated negligent conduct, including but not limited to adopting programs that created financial disincentives for adequate medical care.   Xk, o, Complaint. 

     The plaintiffs allege in the claims that are at issue in this motion that Kaiser, Inc., and Kaiser Hospitals directly breached their duties of due care in providing adequate and necessary medical treatment by failing to ensure that Kaiser Texas and the Medical Association had sufficient, adequately trained physicians.   IXo, Xq, Complaint. 

     The plaintiffs allege in the claims that are at issue in this motion that Kaiser Texas breached its duties of due care in providing adequate and necessary medical treatment by establishing, through its corporate structures and through its contractual and financial arrangements with the Medical Association and Kaiser, Inc., a medical care/health care
program that: failed to provide proper incentives and otherwise financially discouraged physicians and other health care providers from providing necessary medical services; inadequately screened, credentialed, and re-credentialed the physicians and other health care providers hired; fostered inadequate training of health care providers; penalized health care providers for ordering appropriate medical testing; created a system that perpetuated negligent conduct in the treatment of the subscribers under the Service Agreement and used impaired and/or incompetent health care providers; failed to establish and enforce an effective quality control program; and failed to correct a known problem that the Kaiser
health care providers had in diagnosing and treating cardiac conditions.   VII, Complaint. 

     The Complaint also contains allegations regarding the corporate status of each individual defendant and their vicarious liability and responsibility as agents and/or alter egos of each other.  The plaintiffs contend in a claim that is at issue in this motion that Kaiser, Inc., and Kaiser Texas must be considered a single entity for the purposes of assessing liability and damages, and that Kaiser Texas and the Medical Association must also be considered a single entity for the purposes of assessing liability and damages.   XIX, Complaint. 

     Finally, the plaintiffs allege in a claim that is at issue in this motion that Kaiser Texas and Kaiser, Inc., engaged in fraud in that, while holding themselves out as separate, non-profit corporations formed andoperated solely for the purpose of providing health care for their members, they were in fact conceived and operated in a manner that provided financial
interest, ownership, and control to others inconsistent with their non-profit status.  Id. 

     The Kaiser defendants' Motion for Partial Summary Judgment is currently before this honorable Court, with oral argument scheduled for August 7, 1997.  On July 24, 1997, the Secretary filed a Motion for Leave to File Brief Amicus Curiae With Respect to [the Kaiser Defendants'] Motion for Partial Summary Judgment. 

                             ARGUMENT 

I.   THE RECOGNITION PLAN IS AN ERISA PLAN AND KAISER IS A MEDICAL SERVICES PROVIDER TO THE PLAN

     The plaintiffs dispute whether the Kaiser defendants have made a sufficient factual showing that an ERISA plan exists in this case for summary judgment purposes.  The Secretary, of course, takes no position as to any factual dispute or the sufficiency of the Kaiser defendants's showing.  Based solely on the Secretary's review of the record and understanding of the facts, she believes that an ERISA plan exists, as discussed below. 

     Under ERISA, a "welfare plan" includes a "plan, fund, or program" established by an employer to provide medical or health benefits to its employees "through the purchase of insurance or otherwise."  ERISA  3(1), 29 U.S.C.  1002(1).  The Fifth Circuit has adopted a three part test to determine whether a plan meets this statutory definition and is, therefore, an ERISA plan.  Under this test the Court must determine whether the plan:  "(1) exists; (2) falls within the safe-harbor provision established by the Department of Labor; and (3) satisfies the primary elements of an ERISA  employee benefit plan' -- establishment or maintenance by an employer intending to benefit employees."  Meredith v. Time Ins. Co.,
980 F.2d 352, 355 (5th Cir. 1993). 

     The Secretary will address the related first and third steps of the test before discussing the safe-harbor regulation.  Under the first step, the Court must find that a plan exists "if from the surrounding circumstances a reasonable person can ascertain the intended benefits, a class of beneficiaries, the source of financing, and procedures for receiving benefits."
Meredith, 980 F.2d at 355, quoting Donovan v. Dillingham, 688 F.2d 1367, 1373 (11th Cir. 1982) (en banc).  Under the third step the Court must determine: (a) whether an employer established or maintained the plan; and (b) whether the employer intended to provide benefits to its employees.  Meredith, 980 F.2d at 355.  It is not necessary to have a plan document: 

     A formal document designated as "the Plan" is not required to establish that an
     ERISA plan exists; otherwise, employers could avoid federal regulation merely by
     failing to memorialize their employee benefit programs in a separate document so
     designated. 

Memorial Hospital System v. Northbrook Life Insurance Co., 904 F.2d 236, 241 (5th Cir. 1990) (footnote omitted). 

      In Memorial Hospital, the employer established and maintained a plan (although not in a formal document) by purchasing health insurance for its employees and their dependents, paying premiums to the insurer, and collecting and forwarding employee contributions to the insurer.  904 F.2d at 241.  The Fifth Circuit found that this evidence "clearly shows" the employer's "intent to provide its employees with a welfare benefit program through the purchase and maintenance of a group insurance policy."  Id. 

     The instant case appears to present virtually identical facts.  Here, there is no document in the record designated "the Recognition Plan."  Nevertheless, the Recognition Plan is the arrangement by which Recognition undertook to provide health care to its employees and their dependents by contracting with Kaiser Texas for its employees, paying
premiums directly to Kaiser Texas, and collecting and remitting any Recognition employees' contributions to Kaiser Texas.  Accordingly, the Court should find that the first and third parts of the Fifth Circuit test are met. 

     In an early case concerning the definition of an ERISA plan, the Fifth Circuit stated that ERISA does not regulate "bare purchases of health insurance" where the "purchasing employer neither directly or indirectly owns, controls, administers or assumes responsibility for the policy or its benefits."  Taggert Corp. v. Life & Health Benefits Administration,
Inc., 617 F.2d 1208, 1211 (5th Cir.1980), cert. denied, 450 U.S. 1030 (1981).  In Taggert, a corporation and its only employee purchased insurance for the employee through a multiple employer trust ("MET"), "a profit-making enterprise that provided group insurance to employers too small to qualify for group rates on their own."  Memorial Hospital, 904 F.2d
at 242.  The corporation did not participate in the formation of the MET and had no involvement in its day-to-day operations.  The Fifth Circuit held that neither the MET nor the corporation's subscription to the MET constituted an ERISA plan. 

     In Memorial Hospital, the Fifth Circuit sharply distinguished Taggert and limited it to its peculiar facts. Unlike Taggert, Memorial Hospital and the instant case do not involve the bare purchase of insurance by a lone employee through a MET.  Rather, as discussed above, Memorial Hospital and the instant case involve employers that established a plan to provide
medical care to a class of employees through the purchase of a group insurance policy or, in this case, contracted with an HMO.  The employers were solely responsible for submitting premiums and employee contributions to the insurer or, in this case, the HMO.  The "employer-employee-plan relationship"  which was lacking in Taggart is present in Memorial
Hospital and the instant case.  See Memorial Hospital, 904 F.2d at 243.  Because the facts of the instant case are virtually identical to those in Memorial Hospital, this Court should similarly distinguish Taggart and find that the Recognition Plan is an ERISA plan. 

     Further, part two of the Fifth Circuit test, the safe-harbor regulation, does not exclude the Recognition Plan from ERISA coverage.  The safe-harbor regulation provides that the term "employee welfare benefit plan" does not include a group insurance program offered by an insurer to employees under which: (1) the employer does not contribute to the plan; (2)
participation is voluntary; (3) the employer's role is limited to allowing the insurer to publicize the program to employees or plan members and collecting employee premiums and remitting them to the insurer; and (4) the employer receives no profit from the plan.  29 C.F.R.  2510.3-1(j).  Each of the four elements must exist for a plan to be excluded from
ERISA. 

     Based on the present record, at least elements 1 and 3 cannot be satisfied because Recognition makes contributions in the form of premiums and performs functions beyond just allowing Kaiser Texas to publicize the program to employees and remitting employee contributions from payroll deduction.  See Manzone Affidavit Ex. A at 1;  9, Manzone Affidavit.  Therefore, the Recognition Plan is not excluded from ERISA coverage by this regulation and qualifies as an ERISA plan under the three step test in Meredith. 

     Recognition is the Plan's administrator.  Under ERISA, the plan administrator is defined as: 

          (i) the person so designated by the terms of the instrument under which
     the plan is operated; [or]

          (ii) if an administrator is not so designated, the plan sponsor. . . . ERISA  3(16)(A)(i) and (ii), 29 U.S.C.  1002(16)(A)(i) and (ii).  There appears to be no evidence that Kaiser Texas was specifically designated the plan administrator in the Recognition Plan, within the meaning of ERISA  3(16)(A).   Under ERISA, therefore, the Plan sponsor, Recognition, is the administrator. As administrator, Recognition selected Kaiser Texas to be the medical service provider for the Recognition Plan and perform the other functions described above. 

     Kaiser Texas, on the other hand, is not an ERISA plan and is not the administrator of the Recognition Plan under ERISA  3(16)(A).   Rather, it is a medical service provider to the Recognition Plan.  Kaiser Texas does have certain plan administrative functions. The Service Agreement provides that Kaiser Texas is a named fiduciary to review claims under
the Service Agreement, Manzone Affidavit Ex. A at 1.  The plaintiffs, however, did not sue Kaiser Texas in an administrative capacity for denial of benefits.  Rather, the plaintiffs sued Kaiser Texas solely in its capacity as a provider of medical services.  Their claims against Kaiser Texas arise from acts or omissions of defendants in the course of Ronald Henderson's medical treatment and are based on the patient-medical provider relationship, not on the Plan participant-Plan relationship.  State law standards of negligence and agency govern the plaintiffs' claims, not ERISA. 

II.  ERISA   514(a) DOES NOT PREEMPT STATE LAW IN FIELDS OF TRADITIONAL STATE REGULATION, SUCH AS THE COMMON LAW OF NEGLIGENCE AND WRONGFUL DEATH STATUTES, ABSENT A SHOWING THAT PREEMPTION WAS THE CLEAR AND MANIFEST PURPOSE OF ERISA

     A.   ANALYSIS OF WHETHER A STATE LAW IS PREEMPTED BY ERISA
      514(a) REQUIRES LOOKING BEYOND THE TERM "RELATE TO" AND
     ANALYZING THE STATE LAW THROUGH USE OF THE PRESUMPTIONS
     SET OUT IN TRAVELERS

     The broad language of ERISA's general preemption clause, Section 514(a), states that ERISA preempts "any and all State laws insofar as they . . . relate to any employee benefit plan."  29 U.S.C.  1144(a) (emphasis added).  However, application of this broad language to the claims presented in this case is not as simple as is suggested by the Kaiser defendants' bold demarcation of the claims into medical malpractice claims and "anti-managed care claims."  Rather, an analysis of each of the claims presented and the state law under which these claims arise is required in light of the Supreme Court's decision in New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Insurance Co., 514 U.S. 645 (1995). 

     In Travelers, the Supreme Court concluded that ERISA's "relates to" language was not intended to modify the starting presumption that Congress did not intend to supplant state law.  See De Buono v. NYSA-ILA Medical & Clinical Services Fund, 117 S. Ct. 1747, 1751 (1977).  The Supreme Court found that a mere analysis of the phrase "relate to" is not
a meaningful guide to Congressional intent because, if these words "were taken to extend to the furthest stretch of its indeterminacy, then for all practical purposes pre-emption would never run its course for  [r]eally, universally, relations stop nowhere.'" Travelers, 514 U.S. at 655 (citation omitted.)  To interpret Section 514(a) in this manner "would be to read Congress's words of limitation as a mere sham, and to read the presumption against preemption out of the law."  Id. 

     We simply must go beyond the unhelpful text and the frustrating difficulty of defining
     its key term, and look instead to the objectives of the ERISA statute as a guide to the
     scope of the state law the Congress understood would survive.

Id. at 656.  Accordingly, the Supreme Court concluded that, in passing Section 514(a),
Congress intended 

     to ensure that plans and plan sponsors would be subject to a uniform body of benefits
     law; the goal was to minimize the administrative and financial burden of complying
     with conflicting directives among States or between States and the federal government
     . . ., [and to prevent] the potential for conflict in substantive law . . . requiring the
     tailoring of plans and employer conduct to the peculiarities of the law of each
     jurisdiction.

Travelers, id. at 656-57, quoting Ingersoll-Rand Co. v. McClendon, 498 U.S. 133, 142 (1990).  Thus, preemption applies only where it is necessary to achieve these purposes. 

     The Supreme Court held that the courts must start with the "presumption that Congress does not intend to supplant state law."  Travelers, 514 U.S. at 654.  Moreover,
"where federal law is said to bar state action in fields of traditional state regulation," such as
"general health care regulation," the court should assume that the state law is not preempted
"unless [preemption] was the clear and manifest purpose of Congress."  Id. at 655 (citations
omitted). 

     B.   BECAUSE THE CLAIMS IN THIS CASE ARE BASED UPON LAWS
     RELATING TO TRADITIONAL FIELDS OF STATE REGULATION, THEY
     CARRY THE PRESUMPTION THAT THE CLAIMS ARE NOT PREEMPTED

     The Supreme Court has on three occasions addressed the question of the traditional fields of state regulation that would trigger the ERISA presumption.  As noted above, in Travelers the field of "general health care regulation" was recognized as one such field.  Id. In California Division of Labor Standards Enforcement v. Dillingham Construction, 117 S.
Ct. 832 (1997), the Supreme Court further recognized prevailing wage laws and apprenticeship standards as also occupying traditional fields of state regulation.  Finally, in DeBuono the Supreme Court noted that "the historic police powers of the State include the regulation of matters of health and safety."  117 S. Ct. at 1751. 

     In DeBuono, a Taft-Hartley ERISA health plan owned and operated a hospital for the purpose of providing benefits to its participants.  The Supreme Court found that a state hospital tax paid by the ERISA plan was not preempted, even though ERISA's fiduciary duty provisions would have applied to the operation of the hospital.  The argument against
preemption is stronger in the instant case because the challenged law affects only a service provider to a plan, and not the plan itself. 

     The Texas common law of negligence with respect to the provision and arrangement of medical care and the Texas wrongful death statute at issue in this case are, without question, laws relating to traditional fields of state regulation. They are also part of a broad spectrum of state laws regulating health care in that they provide remedies for negligence in  the delivery of health care.  Therefore, the Kaiser defendants bear "the considerable burden of overcoming  the starting presumption that Congress does not intend to supplant state law,'" De Buono, 117 S.Ct. at 1752, by demonstrating that it was the clear and manifest purpose of Congress to preempt the Texas law.  As explained below, the Kaiser defendants
cannot meet this burden. 

     C.   ERISA  514(a) DOES NOT PREEMPT THE STATE LAW CLAIMS
     AGAINST THE KAISER DEFENDANTS AS THEY DO NOT SUBJECT THEM
     TO CONFLICTING REGULATION IN THEIR ACTIONS INVOLVING PLAN
     ADMINISTRATION

     "[N]othing in the language of [ERISA] or the context of its passage indicates that Congress chose to displace general health care regulation, which historically has been a matter of local concern . . . ."  Travelers, id. at 656.  In light of the Supreme Court's pronouncement, the Kaiser defendants simply cannot show that Congress intended to supplant
the state laws governing claims for negligence in the provision or arrangement of medical care. 

     Where ERISA provides law governing an area, such as plan administration, preemption of state law in that area is very broad.  Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41 (1987) (state tort claim based on denial of claim for benefits is preempted).  In the instant case, however, care must be taken to distinguish the Kaiser defendants' functions administering the Recognition Plan and their functions as corporations in the business of arranging and providing medical services for a fee to the subscribers to the Service Agreement.  The distinction between plan administration and the provision of non-administrative services, such as health care, to a plan can be better understood by examining the essential elements that constitute a plan and the core administrative functions of a plan. 

     ERISA  3(1), which defines "employee welfare plan," does not have a separate definition of the terms "plan, fund or program," but the essentials of a plan have been interpreted to be "[a]t a minimum, . . . the existence of intended benefits, intended beneficiaries, a source of financing, and a procedure to apply for and collect benefits." Donovan v. Dillingham, 688 F.2d 1367, 1371 (11th Cir. 1982).  The administrative procedures needed for a plan to function, the "administrative realities" of plans, include "determining eligibility, calculating benefit levels, making disbursements, monitoring the availability of funds for benefit payments, and keeping appropriate records to comply with reporting requirements."  Fort Halifax Packing Co., Inc. v. Coyne, 482 U.S. 1, 9 (1987) (ERISA preempts state law that would subject these functions to conflicting requirements of different states); Smith v. Jefferson Pilot Life Insurance, Co., 14 F.3d 562, 570 (11th Cir.
1994) (kind of notice required to terminate coverage "lies at core of plan administration"); Aetna Insurance Co. v. Borges, 869 F.2d 142, 146-47 (2nd Cir.), cert. denied, 493 U.S. 811 (1989) ("Determining eligibility for a benefit and the amount of that benefit" are "primary administrative functions of benefit plans"). 

     Here, the ERISA plan is the Recognition Plan, which is the arrangement by which Recognition undertook to provide medical care benefits to eligible employees by contracting with Kaiser Texas for these employees to become subscribers under the Service Agreement. As subscribers to the Service Agreement, Recognition employees were entitled to medical
services from doctors arranged for and provided by Kaiser Texas and paid by the Medical Association through its contract with Kaiser Texas.  The administrative functions necessary for the plan to operate are determining eligibility, determining whether a particular treatment is covered by the Recognition Plan, sending required notices, and keeping necessary records. 

     In its capacity as a provider and arranger of medical services, Kaiser Texas has contracted with other service providers (such as Kaiser Hospitals and the Medical Association) for doctors and hospitals to provide direct care to the subscribers under the Service Agreement.  The Kaiser defendants also establish procedures for the delivery of 
medical care, such as the procedure for referral from the primary care physician to specialists. 

     When entering into these contracts and establishing these procedures, the Kaiser defendants were not acting as administrator of the Recognition Plan or of any other ERISA plan, but rather on their own corporate behalf.  Any decision made by the Kaiser defendants regarding the payment of its health care providers was a business decision made in its
capacity as a provider or arranger of medical services for a fee.  These decisions were not acts of plan administration.  Therefore, claims based upon these decisions do not subject the plan's administration to conflicting state laws. 

     If these decisions were considered to be acts of plan administration, it would lead to an absurd result.  As the Kaiser defendants have a financial incentive to arrange for and provide medical care at the least expense to itself, even as non-profit corporations, these decisions are business decisions.  Because determining the compensation of its health care providers is a discretionary act, it would be a fiduciary act under ERISA  3(21)(A), 29 U.S.C.  1002(21)(A), if performed on behalf of a plan; therefore, Kaiser defendants could not effectively conduct themselves as a business because of an inherent conflict of interest. Their interest in keeping the corporations financially sound would conflict with their duty as a fiduciary to act solely in the interests of the participants and beneficiaries under ERISA  404(a)(1)(A).  For example, in selecting their doctors or other health care providers and in determining how to compensate them, the Kaiser defendants would not be permitted to consider their own costs or act in their own interests, but would be required to act solely in the participants' interests. 

     Of the three Kaiser defendants, only Kaiser Texas performed any administrative functions for the Recognition Plan.  Under the Service Agreement, the only administrative function performed by Kaiser Texas for the Recognition Plan was the review of claims.  See Manzone Affidavit Ex. A at 1. 

     The state laws at issue here have nothing to do with actions Kaiser Texas may have taken in administering the Recognition Plan.  They do not subject the administration of the Recognition Plan to conflicting state laws and, therefore, do not interfere with the clear and manifest purpose of Congress in enacting ERISA  514(a).  The state laws at issue all relate to Kaiser Texas' other role as a medical service provider and are within areas of traditional state regulation that Congress intended to preserve. 

     D.   THE KAISER DEFENDANTS HAVE NOT DEMONSTRATED THAT IT
     WAS THE CLEAR AND MANIFEST PURPOSE OF CONGRESS IN
     ENACTING ERISA  514(a) TO PREEMPT STATE ACTION INVOLVING
     MIS-MANAGED CARE

     The Kaiser defendants contend that certain of the plaintiffs' claims, alleging injury caused by the negligence of the Kaiser defendants involving financial arrangements among themselves and with other health care providers that discouraged adequate or necessary care (characterized by the Kaiser defendants as "anti-managed care" claims, but see note 4, supra) are preempted.  However, the Kaiser defendants have failed to carry their burden of demonstrating that preempting mis-managed care claims was a clear and manifest purpose of Congress in enacting ERISA  514(a).  Accordingly, the presumption of non-preemption prevails. 

     The Kaiser defendants have not demonstrated that it was the clear and manifest purpose of Congress to preempt state laws which subject them to state regulation in their capacity as health care, or "managed care," providers.  Actions taken by the Kaiser defendants in their capacity as a service provider are, therefore, subject to state laws regulating the quality of the service provided, although state laws regulating their actions taken reviewing claims for the Recognition Plan under the Service Agreement are preempted. 

     The recent decision in Shea v. Esenstein, 107 F.3d 625 (8th Cir. 1997), relied upon by the Kaiser defendants, is not analogous to the instant case in that the action brought in Shea was based Medica's failure to disclose incentive fees, while in the instant case the plaintiffs do not allege that there is a duty under state law to disclose the incentive fee
arrangement.  In any event, the decision is ultimately flawed by its failure to distinguish between the acts of plan administration and acts taken in its capacity as a medical service provider and, for that reason, should not be followed. 

     The Kaiser defendants also rely upon the holding in Lancaster v. Kaiser Foundation Health Plan of Mid-Atlantic States, Inc., 958 F. Supp. 1137 (E.D. Va. 1997), which again demonstrates the importance of identifying which elements of a service providers' activities are performed in their capacity as a service provider, and which are performed as an
administrator of the plan.  In Lancaster, direct negligence and fraud claims (in addition to medical malpractice and vicarious liability claims) were brought by a minor child and her mother against a group model HMO following the HMO's alleged misdiagnosis of the child's brain tumor.  The plaintiff's claimed that the HMO's financial incentive program, by
which the physicians received bonuses for avoiding excessive treatments and tests, affected the quality of care provided by encouraging the physicians to make treatment decisions on other than medical grounds.  The district court, while holding that the medical malpractice and vicarious liability claims were not preempted, held that the direct negligence claims (against the HMO and the medical group that employed the physicians) for promulgating the financial incentive program, as well as the fraud claims (against the HMO, the medical group, and the physicians) for concealing the financial incentive program's existence, were preempted as challenging an administrative decision that had the effect of denying benefits. 

     The Lancaster court's characterization of a claim for negligent arrangement of medical care as a claim involving the denial of a benefit is flatly contrary to Dukes v. U.S. Healthcare, Inc., 57 F.3d 350 (3d Cir. 1995).  In Dukes, which was cited with approval by the Lancaster court as "blaz[ing] precisely the analytical trail followed here," Lancaster, 958
F. Supp. at 1144, the Third Circuit considered the question of whether claims against an HMO for direct negligence for failing to select, monitor, and evaluate its personnel and for vicarious liability for the negligence of the plan's medical service provider were completely preempted.  While the Lancaster court applied the "quantity vs. quality of care" analysis
outlined in Duke to conclude that the financial incentive program affected the quantity of care and was thus completely preempted, it strayed from the analytical trail of Dukes while applying the definition of "quality of care." 

     Nothing in the complaints indicates that the plaintiffs are complaining about their
     ERISA welfare plans' failure to provide benefits due under the plan.  Dukes does not
     allege, for example, that the Germantown Hospital refused to perform blood studies
     on Darryl because the ERISA plan refused to pay for these studies.  Similarly, the
     Viscontis do not contend that Serena's death was due to their welfare plan's refusal to
     pay for or otherwise provide for medical services.  Instead of claiming that the
     welfare plans in any way withheld some quantum of plan benefits due, the plaintiffs
     in both cases complain about the low quality of the medical treatment that they
     actually received . . . .

Dukes, 57 F.3d at 356-57. 

     It is important to note that the malpractice complained of by Dukes was both the failure and refusal of the medical providers to perform additional blood studies, and that the malpractice complained of by the Viscontis was, in part, the failure of Serena's obstetrician to provide additional treatment for the treatment of her symptoms of preeclampsia. As in Dukes, the plaintiffs here are not alleging that the medical providers failed to perform additional testing because the ERISA plan refused to pay or otherwise provide for medical services, or that the plan in any way withheld some quantity of plan benefits due.  Instead, as in Dukes, the plaintiffs claim that the Kaiser defendants' actions were a legally significant
cause of the negligent medical treatment. 

     The simple fact that negligent medical treatment may cost less than competent medical treatment, and may therefore affect the "quantity" of medical care provided, does not serve to trigger preemption under the Dukes analysis.  It is, therefore, obvious that court in Lancaster failed to use the same benchmark as the Dukes court in determining whether the
"quantity" of care was affected, and therefore preempted. 

     The Fifth Circuit has specifically stated that malpractice claims arising from decisions "made by a doctor in the course of treatment" are not preempted.  Corcoran v. United Healthcare, Inc., 965 F.2d 1321, 1331 n.16 (5th Cir. 1992).  In Corcoran, the health plan sponsored by Mrs. Corcoran's employer had a cost-containment feature known as "utilization review."  Id. at 1323.  That provision required plan participants to obtain advance approval (or "pre-certification") for overnight hospital admissions and certain medical procedures.  Id. Unless pre-certification was obtained, the plan would not pay for such hospitalizations or procedures.  Id. The employer contracted with United Healthcare, Inc. ("United") to make the pre-certification decisions for the plan. 

     Toward the end of her pregnancy, Mrs. Corcoran's physician ordered her hospitalized so that he could monitor the fetus around the clock.  Id. at 1322-23.  Mrs. Corcoran sought pre-certification from United for this hospitalization.  United denied the request on the grounds that the hospitalization was unnecessary.  Id. at 1324.  The fetus went into distress
and died.  Id.  The Corcorans sued United for medical negligence.  Id. 

     In a straight application of Pilot Life, the court held that ERISA preempted the Corcoran's negligence action.  As in Pilot Life, the state common law cause of action asserted by the Corcorans arose from the denial of a benefit under an ERISA plan and, therefore, was preempted.  Id. at 1332.  The court recognized that United necessarily exercised medical judgment in determining whether to grant the requested hospitalization, but found that United did so only in the "context of making a determination about the availability of benefits under the plan."  Id. at 1331.  United's medical decision was not made in the context of treating Mrs. Corcoran as a patient, that is, United's decision was not one "made by a doctor in the course of treatment."  Id. at 1331 n.16.  The court expressly recognized, without disapproval, the cases holding that negligence actions against physicians for decisions made in the course of treatment are not preempted and found them distinguishable on their facts only.  Id. citing, e.g., Independence HMO v. Smith, 733 F. Supp. 983 (E.D. Pa. 1990). 

     Corcoran does not stand for the proposition that state claims relating to an HMO cost-containment program are preempted.  It only found that the utilization review decisions are determinations of claims for benefits, and state claims arising therefrom are preempted under Pilot Life.  In Corcoran, claims for negligence in the delivery of medical care, i.e., a
treating physician's malpractice, were not preempted.  The negligence claims against the Kaiser defendants falls into the second category in Corcoran and, thus, are not preempted. 

     The courts have confirmed the distinction between actions based on the denial of a claim for benefits, which are preempted, and actions based on tortious conduct in the delivery of medical care, which is not preempted in cases where the HMO is alleged to be vicariously liable for the negligence of its doctors.  The Tenth Circuit has ruled that a claim
against an HMO for vicarious liability for the malpractice of its doctors, where the doctor is the actual or ostensible agent of the HMO, is not preempted by ERISA  514(a).  Pacificare Inc. v. Burrage, 59 F.3d 51 (10th Cir. 1995); Prudential Health Care Plan, Inc. v. Lewis, 77 F.3d 493 (10th Cir. 1996).  Most federal district courts and state courts which have
considered the issue have also ruled that such claims are not preempted.  In contrast, claims of vicarious liability for negligence in the denial of a claim for benefits were preempted in Jass v. Prudential Health Care Plan Inc., 88 F.3d 1482, 1485 (7th Cir. 1996). 

    In Jass, Betty Jass received medical care from PruCare, a managed care program, through an ERISA covered health plan sponsored by her husband's employer.  88 F.3d at 1485  She underwent complete knee replacement surgery and subsequently requested rehabilitation treatment.  Id. at 1485  PruCare determined that rehabilitation was medically
unnecessary and, as plan administrator, denied her claim for benefits under the terms of the plan.  Id. at 1485  Jass sued her doctor and PruCare, alleging that the doctor negligently failed to provide treatment and that PruCare was vicariously liable for the doctor's negligence.  Id.  Following Pilot Life, the Seventh Circuit found that the claims were preempted because they arose from a denial of benefits.  Id. at 1493.  The Court distinguished Pacificare on this and other grounds.  Id. 

    The other apparent rationales for the court's holding in Jass are erroneous.  The court stated that "[t]o allow a vicarious liability claim against an ERISA Plan for the alleged negligence of a listed physician would require multi-state plans to vary their plan administration to avoid strict vicarious liability under differing state laws."  Id.  This is wrong because it equates the HMO to the ERISA plan.  As fully discussed above, the HMO is not an ERISA plan, it is a separate corporation that provides services to a plan.  Differing state laws on vicarious liability affect only the HMO's liability; the plan has no liability. 

    The court in Jass also stated that the claims relate to an ERISA plan because "to determine whether an actual or apparent agency relationship existed between [the doctor] and PruCare would require an examination of the health care benefit plan to determine the relationship between [the doctor], PruCare and Jass."  Id.  This also is erroneous because the relation between the doctor and PruCare has nothing to do with the structure of the plan; it relates only to how PruCare conducts its business of arranging for medical care.  Further, under Travelers, a claim could not be preempted simply because it requires an examination of a benefit plan. 

    Finally, the court found that, absent the plan, Jass probably would not have gone to the doctor with whom PruCare contracted.  This rationale is also erroneous under Travelers. The same faulty rationales in Jass are found in cases were courts have found claims against HMOs for negligence in arranging for or providing medical care to participants in ERISA
covered health plans to be preempted. 

    Accordingly, application of  Travelers and its progeny requires the conclusion that the claims in this case are not preempted.
                            CONCLUSION

    For the foregoing reasons, the Secretary respectfully suggests that the Kaiser defendants's Motion for Partial Summary Judgment should be denied as to the issues addressed hereinabove.
                   Respectfully submitted,

                   For the Secretary of Labor

                   J. DAVITT McATEER
                   Acting Solicitor of Labor

                   MARC I. MACHIZ
                   Associate Solicitor
                   Plan Benefits Security Division

                   KAREN HANDORF
                   Counsel for Special Litigation
                   Plan Benefits Security Division
 
 

                   ___________________________________
                   CHARLES MICHAEL JACKSON
                   Trial Attorney
                   U.S. Department of Labor
                   Office of the Solicitor
                   Plan Benefits Security Division
                   P.O. Box 1914
                   Washington, DC 20013
                   (202) 219-4600 APPENDIX A - Excerpt from Kaiser Permanente Member Handbook, Spring 1995                       CERTIFICATE OF SERVICE

    I hereby certify that a true and correct copy of the foregoing Secretary of Labor's Brief as Amicus Curiae With Respect to Defendants Kaiser Foundation Health Plan of Texas, Kaiser Foundation Health Plan, Inc., and Kaiser Foundation Hospital's Motion for Partial Summary Judgment was sent to the following by FedEx overnight courier this 2nd day of
August 1997:

John A. Scully, Esq.
Cooper, Aldous & Scully, P.C.
Founders Square
900 Jackson Street, Suite 100
Dallas, TX 75202

Tony D. Crabtree, Esq.
Hyatt, Crabtree & Moore, P.C.
5910 N. Central Expressway
Premier Place, Suite 1380
Dallas, TX 75206

Mike McCauley, Esq.
McCauley, MacDonald & Devin
3800 Renaissance Tower
1201 Elm Street
Dallas, TX 75270



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