The Health Lawyer, October 2005 - Sedgwick LLP

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The Health Lawyer, October 2005 - Sedgwick LLP

S E D G W I C K | I N T H E N E W S | FA L L 2 0 0 5

An Overview of FEHBA and the

Power of Its Preemption

While the healthcare industry is dominated by a growing number of acronyms, practitioners and clients alike are

often unfamiliar with one that has been around for more than 45 years: FEHBA. Originally enacted in 1959, the

Federal Employee Health Benefits Act (“FEHBA”) established a program to provide federal employees, federal

retirees, and their eligible family members (collectively “enrollees”) with subsidized healthcare benefits. See 5

U.S.C. §§ 8901-8913. With more than nine million participating Americans today, FEHBA is the largest employersponsored

group health insurance program in the world. 3

FEHBA is a comprehensive statutory

and regulatory scheme that establishes

the Federal Health Benefits

Program and indictates how claim decisions

are to be resolved. In doing so,

it provides only limited judicial review,

with a broad preemption clause that is

similar to the one found in the Employee

Retirement Income Security Act of

relied, at least in part, on Davila

to hold that a cause of action pled as

a medical malpractice or mixed treatment/eligibility

case was completely

preempted by FEHBA.

This article provides a comprehensive

overview of FEHBA and addresses how

courts will likely respond to claimants’

By Fred A. Smith, III, 1 and David M. Goldhaber 2 | Sedgwick, Detert, Moran & Arnold LLP

1974 (“ERISA”). Despite the restrictions

set forth by FEHBA, claimants

who are dissatisfied with the limitation

on their ability to recover damages are

increasingly trying to avoid preemption

to litigate their claims under more liberal

state laws and expand the amount

of recovery available.

Given the similarity between the

preemption clauses found in ERISA

and FEHBA and the limited case

law discussing FEHBA preemption,

courts often look to ERISA preemption

decisions for guidance. 4 While some

claimants have successfully avoided

FEHBA preemption in the past, claimants

will likely encounter increased

difficulties in circumventing the limited

judicial review allowed by FEHBA in

light of the United States Supreme

Court’s decision in Aetna Health, Inc.

v. Davila, the new seminal case on

ERISA preemption. 5 Indeed, at least

one Illinois federal court has now

attempts to avoid its sweeping preemption

scheme.

An Overview of FEHBA

Congress first enacted FEHBA after

recognizing that a viable solution

was needed for the rising costs of

medical care in the United States.

FEHBA’s stated goal was to provide

“a measure of protection for civilian

Government employees against the

high, unbudgetable, and, therefore,

financially burdensome costs of medical

services through a comprehensive

government-wide program of insurance

for federal employees . . . the

costs of which will be shared by the

Government, as employer, and its

employees.” 6 A broad class of individuals

are allowed to enroll in FEHB

health plans. 7 The Office of Personnel

Management (“OPM”), which serves

as the federal government’s humanresource

agency, is tasked with the

overall responsibility for running and

enforcing this program.

Under FEHBA, the United States does

not serve as a healthcare insurer. Rather,

the United States, through the OPM,

contracts with various private insurers

— referred to as “carriers” in the Statute

— on behalf of enrollees to provide

healthcare plans with various coverages

and costs. 8 FEHBA requires contracts

between the carriers and OPM to

contain a detailed Statement of Benefits

that includes maximums, limitations and

other terms related to benefits. 9 The

Statement of Benefits section is in turn

incorporated into the federal contract

and serves as the official description of

benefits and plan terms. 10

The term “carrier” is broadly defined

in FEHBA. 11 Consequently, various

private insurers and other health care

entities, including health maintenance

organizations (“HMO’s), participate in

this program. In fact, there are currently

more than 350 health plans for program

enrollees to choose from. 12 The OPM

subsidizes the federal program by “contributing

60% of the average premium.” 13

The health plans’ contracts are typically

for a one-year term and negotiated annually.

Enrollees are permitted to switch

plans during each open enrollment

period. 14 Individual policies or contracts

are not issued to program enrollees.

FEHBA itself does not outline the

specific methods of dispute resolution

This article was published in the American Bar Association Health Law Section’s The Health Lawyer.


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An Overview of FEHBA and the Power of Its Preemption Continued

or set out what remedies are available

under the statute. Instead, FEHBA

vested the OPM with the power to promulgate

the necessary regulations to

carry out the congressional mandate. 15

The OPM in turn created a detailed

regulatory scheme for handling claims

and resolving disputes over benefit determinations.

See 5 C.F.R. 890.101, et

seq. The OPM regulations provide the

specific procedures for how medical

benefit claims are to be administered.

The Administration of

FEHBA Claims

Under FEHBA, carriers are empowered

to make claim decisions pursuant

to the terms of their plans. The carriers

often subcontract with third-party

administrators (“TPA”s) to perform the

claims handling on their behalf. In

resolving claims, the carriers or TPAs

determine issues such as medical

necessity, length of hospital stay,

whether services are covered under

the enrollee’s plan and whether the

claim should be denied. When a carrier

denies a claim, an individual has

six months in which to seek “reconsideration.”

16 A carrier then has 30 days to

either: (1) affirm the denial; (2) pay the

bill; or (3) request additional information

in order to reconsider the claim. 17

If the plan requests additional information,

it must reach its decision within 30

days from receipt of that information. 18

FEHBA also calls for a mandatory

administrative review process through

the OPM. The statute’s legislative

history notes that Congress intended

that the OPM’s review process would

provide an “adequate administrative

remedy” for enrollees and would

prevent them from being “forced into

courts” to recover the benefits they

are due. 19 If an enrollee believes that

the FEHBA insurer, or its TPA, has

wrongfully denied medical benefits or

simply failed to respond to the claim,

the individual may ask the OPM to

review the claim’s handling and/or the

insurer’s decision. 20

Congress first enacted FEHBA after recognizing that a viable solution

was needed for the rising costs of medical care in the United States.

FEHBA’s stated goal was to provide “a measure of protection for civilian

Government employees against the high, unbudgetable, and, therefore,

financially burdensome costs of medical services.”

Thus, under FEHBA, if a plan enrollee

challenges a carrier’s final claim decision,

he/she must first submit the claim

to the OPM for a “review process.” 21

The enrollee must request an OPM

review within: (1) 90 days after the

carrier’s decision; (2) 120 days after

the request for benefits to the carrier if

it fails to respond; or (3) 120 days after

a carrier requests additional information

from the enrollee but fails to act

on it. 22 The OPM is in turn required to

provide the claimant with a written notice

of its decision within 90 days after

his/her request for the review. 23 After

reviewing the claim, the OPM may either:

(1) request additional information

to further evaluate the claim; (2) obtain

an advisory opinion from an independent

physician; or (3) reach a decision

based solely on the information provided

by the individual. 24 Interestingly,

the OPM also has the right to reopen

its review process if new evidence

becomes available at a later time. 25

FEHBA expressly requires participating

carriers to comply with the OPM’s

interpretation of their plans. This enables

the OPM to develop a consistent

application of the participating health

plans. FEHBA also vests the OPM with

the authority to compel a carrier to

pay an enrollee if the OPM resolves a

benefits dispute in his/her favor. 26

Limited Judicial Review

What options are available to an

enrollee if a carrier denies a claim and

the OPM agrees with the denial If the

claimant still disagrees with the OPM’s

denial, the claimant may then sue the

OPM to obtain judicial review of the

OPM’s decision. However, this judicial

review is quite limited.

First, judicial review is only allowed

after an individual exhausts the review

process of both the carrier and the

OPM. 27 Second, an individual requesting

judicial review may only challenge

a “final action” from the OPM concerning

the denial of a benefit. 28 There is

no challenge of the insurer’s determination.

Third, in light of the restriction

only allowing review of “final action” by

the OPM, lawsuits can only be brought

against the OPM. 29 Neither participating

insurers nor their TPAs are proper

parties in these actions. Finally, judicial

relief is strictly limited to evaluating

whether the OPM should require the

carrier to pay the benefits in dispute or

confirm that the denial was proper. 30

A claimant must initiate a lawsuit

against the OPM within three years

of when the medical care or service

was provided. 31 The United States

District Courts have original jurisdiction

over the suits. When reviewing the

OPM claim decision, courts are strictly

limited to the record that existed when

the OPM rendered its final decision. 32

[ 2 ] Sedgwick, Detert, Moran & Arnold LLP


Because FEHBA does not specifically

provide otherwise, the Administrative

Procedure Act, 5 U.S.C. §§ 500

through 706, governs judicial review of

OPM decisions. 33 Under the Administrative

Procedure Act, the court must

afford considerable deference to the

OPM’s findings and set aside an action

only if it was “arbitrary, capricious, an

abuse of discretion, or otherwise not in

accordance with law.” 5 U.S.C.

§ 706(2)(A). But, unlike the procedures

provided for successful ERISA

claims, a successful FEHBA litigant

cannot recover attorneys fees or

costs. 34 As discussed below, state law

remedies are also preempted.

This limited judicial review scheme

effectively prevents claimants from

pursuing medical benefit claims

against the carriers and their subcontracting

TPAs. See, e.g., Botsford v.

Blue Cross and Blue Shield of Montana,

Inc., 314 F.3d 390, 397 (9th Cir.

2002) (allowing suits against parties

other than the OPM would undermine

the federal scheme: “We conclude that

Congress intended to limit the defendant

in suits involving disputes over

FEHBA benefits to the United States.”).

However, attorneys for claimants have

long attempted to look for and create

ways to avoid FEHBA’s limited judicial

review and preemption clause to take

advantage of the broader remedies

available under various state laws.

Preemption Under FEHBA

Under well-established jurisprudence,

a claim may arise under federal law if

a federal statute preempts state law

in a particular field. 35 Courts typically

commence their preemption analysis

with a review of the allegations set forth

in the complaint — often referred to as

the “well-pleaded complaint” rule — to

determine whether a federal question is

presented by the pleadings. However,

the “complete preemption” doctrine

serves as an exception to that rule.

See, e.g., Jass v. Prudential Health

Care Plan Inc, 88 F.3d 1482, 1487 (7th

Cir. 1996) (recognizing that a claim pled

as a state law claim is properly “recharacterized”

as a complaint arising under

federal law when Congress has legislatively

displaced the claim). Consequently,

federal subject matter jurisdiction

exists if the complaint concerns an

area of law “completely preempted” by

federal law, even if the complaint fails to

mention a federal basis of jurisdiction. 36

FEHBA is intended to be one such

statute and should therefore completely

preempt certain state law claims.

In 1978, Congress amended FEHBA

to include a preemption clause. The

policy underlying the amendment was

to ensure uniformity in the administration

of FEHBA plan benefits. 37 The

1978 preemption section stated:

The provisions of any contract

under this chapter which relate to

the nature or extent of coverage or

benefits (including payments with

respect to benefits) shall supersede

and preempt any State or local law,

or any regulation issued thereunder,

which relates to health insurance or

plans to the extent that such law or

regulation is inconsistent with such

contractual provisions.

Act of Sept. 17, 1978, Pub. L. No.

95-368, § 1, 92 Stat. 606 (amended

1998). Congressional legislative history

reveals that the purpose of this

clause was to “supersede and preempt

any State or local law, or any regulation

issued under such law relating to

health insurance or plans, to the extent

that such law or regulation is inconsistent

with the provisions of the Federal

employees’ health benefits contract.” 38

Notwithstanding the legislative history,

the preemption clause only specified

that state and local laws and regulations

were preempted where they were

“inconsistent with such contractual

provisions” established under FEHBA. 39

This allowed Courts to reject FEHBA

preemption if the state laws were found

to be “consistent” with the FEHBA benefit

contract provisions. Court decisions

on the extent and scope of FEHBA

preemption varied from jurisdiction

to jurisdiction, and a split in authority

developed. 40 Some courts relied

In 1978, Congress amended FEHBA to include a preemption clause.

The policy underlying the amendment was to ensure uniformity in the

administration of FEHBA plan benefits.

upon the preemption clause to thwart

state law claims. 41 Many others found

exceptions to preemption and allowed

plaintiffs to have their day in state court

to pursue their state law claims. 42 In

another attempt to get around preemption,

plaintiffs also argued that their

state law claims were not preempted by

§ 8902(m)(1) because they only related

to the manner in which the benefit claim

was processed (arguing improper claim

handling) rather than the “nature and

extent of coverage.” While few courts

have been faced with this argument, at

least one court has rejected it. 43

Given the scarcity of cases analyzing

FEHBA preemption, courts also looked

to the body of case law interpreting the

ERISA preemption clause for guid-

Sedgwick, Detert, Moran & Arnold LLP [ 3 ]


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An Overview of FEHBA and the Power of Its Preemption Continued

ance. 44 However, this case law also

varied by jurisdiction, and inconsistencies

between circuits emerged. This

inconsistent case law also helped fuel

uncertainty over preemption of FEHBA

cases in certain courts. Some authors

even called on Congress to amend

§ 8902(m)(1) to provide a more clear

statement as to the scope of FEHBA

preemption. 45 All of these factors led to

the amendment of the FEHBA preemption

provision to clarify its reach.

In 1998, Congress amended the preemption

clause to expand federal jurisdiction

over FEHBA claims and cure

the inconsistent results in the courts.

The broader provision now states:

The terms of any contract under this

chapter which relate to the nature,

provision or extent of coverage or

benefits (including payments with respect

to benefits) shall supersede and

preempt any State or local law, or any

regulation issued thereunder, which

relates to health insurance or plans.

See 5 U.S.C. § 8902(m)(1). This

amended section eliminated the

language concerning “inconsistent

state laws.” Congress designed the

new provision to “strengthen the ability

of national plans to offer uniform

benefits and rates to enrollees regardless

of where they may live.” 46 It also

intended to “strengthen the case for

trying FEHBA program claims disputes

in federal courts rather than state

courts.” 47 Finally, the broader preemption

clause is designed to keep cases

in federal courts where there will be a

more uniform application of FEHBA and

its regulatory scheme. This in turn allows

the OPM to control the cost of the

program and avoid a “patchwork quilt of

benefits” that vary among the states. 48

With this amendment, the FEHBA

preemption clause now more closely

resembles its counterpart in ERISA. 49

While ERISA preemption decisions

often receive a great deal of attention

in the courts and media, little is heard

about preemption under FEHBA since

the claims are not as prevalent.

Congress amended FEHBA’s preemption clause to expand federal

jurisdiction over FEHBA claims and cure the inconsistent results in

the courts.

Preemption Decisions

Following the 1998 amendment to

§ 8902(m)(1), courts almost universally

have recognized its broad application.

50 These decisions, and the FEHBA

preemption scheme, however, did not

stop claimants from trying to advance

certain state law claims. The preemption

clause is therefore still one of the

more litigated aspects of FEHBA.

Medical benefit claimants have historically

had some success in avoiding preemption

by characterizing their claims

as involving both questions of eligibility

for benefits and the appropriateness of

medical care. Such matters have been

termed mixed eligibility and treatment

cases. The legal authority most often

cited by claimants to support these

claims has been the Supreme Court’s

decision in Pegram v. Herdrich. 51

In Pegram, an HMO plan participant

consulted a physician for stomach pain

resulting from an inflamed abdomen.

The physician required the beneficiary

to wait eight days for an ultrasound to

be performed at a facility staffed by

HMO physicians more than 50 miles

away. During the waiting period, the

participant’s appendix ruptured, causing

peritonitis. The plan participant

then sued the HMO and her treating

physician in state court alleging medical

malpractice and fraud. Asserting

ERISA preemption, the defendants

removed the case to federal court and

sought a dismissal of the claims in favor

of the relief provided under ERISA.

In analyzing ERISA preemption, the

Supreme Court held that mixed eligibility

and treatment decisions made

by the HMO, through its physician

employee(s), were not fiduciary decisions

under ERISA. The state medical

malpractice claims therefore survived.

Some courts subsequently relied upon

the holding in Pegram to carve out

medical malpractice and quality of care

exceptions to FEHBA preemption.

One example occurred in Roach v.

Mail Handlers Benefit Plan. 52 There a

federal employee allegedly received

improper medical treatment from her

plan which required her to have ankle

surgery. She sued her health plan

and its subcontractor in state court

alleging medical malpractice, breach

of contract and other state law claims.

While the employee alleged traditional

malpractice claims in her complaint,

she also alleged a denial of medical

treatment certification under her medical

benefits plan. Asserting complete

preemption of the claims under

FEHBA, the defendants removed the

case to federal court and secured a

summary judgment.

On appeal, the plaintiff argued that the

district court erred by characterizing

her medical malpractice claim as a denial

of benefits preempted by FEHBA.

[ 4 ] Sedgwick, Detert, Moran & Arnold LLP


After evaluating the factual record, the

U.S. Court of Appeals for the Ninth

Circuit agreed and held that FEHBA

did not preempt the participating health

plan participant’s medical malpractice

claim. 53 The Ninth Circuit explained

that FEHBA preemption must be

interpreted “to protect both the federal

interest in the uniform administration of

FEHBA benefits and a state’s interest

in the quality of medical care.” 54 The

court concluded that the mere reference

to the existence of a benefit plan

in a state law claim, without more,

does not endanger the uniform federal

interpretation of a FEHBA plan. 55 Other

cases followed the holding in Roach. 56

The import of such mixed eligibility/

treatment decisions has now been significantly

limited by Aetna Health, Inc.

v. Davila. In Davila, the U.S. Supreme

Court reversed two decisions rendered

by the Fifth Circuit. In these cases,

the Fifth Circuit had rejected ERISA

preemption and allowed plan participants

to sue their healthcare plans for

negligent denial of benefits under the

Texas Healthcare Liability Act (“THLA”).

Passed in 1997, the THLA allowed

patients to sue their HMOs for negligent

denial of benefits and provided

for compensatory and punitive damages

against HMOs for their coverage

decisions. At least nine other states,

including Arizona, California, Georgia,

Maine, New Jersey, North Carolina,

Oklahoma, Washington and West Virginia,

had enacted similar laws. 57

In one of the consolidated cases

in Davila, the plaintiff suffered from

bleeding ulcers. He contended that this

condition resulted from the plan’s decision

to restrict his treatment. While

the plaintiff’s physician had prescribed

Vioxx to treat arthritis pain, his HMO

plan required two less expensive medications,

covered by the plan’s formulary,

to be used before Vioxx could be

approved. Plaintiff maintained that this

caused his adverse medical condition;

he then sued the plan under the THLA.

In the second case, the plaintiff developed

post-surgical complications

from a hysterectomy which required a

second hospital admission. The claimant

maintained that this was caused

when the nurse from her HMO originally

only approved a one-day hospital stay

despite her physician’s recommendation

that she recuperate in the hospital

for several days. The plaintiff there, too,

brought an action under the THLA.

The Fifth Circuit found that ERISA

did not preempt the THLA and ruled

that these plaintiffs could pursue their

state law claims. The Supreme Court

reversed. It held that plaintiffs’ actions

against their respective HMOs for alleged

failures to exercise ordinary care

in handling coverage decisions were

completely preempted by ERISA and

removable to federal court. It reasoned

that any state law cause of action that

duplicates, supplements or supplants

ERISA’s civil enforcement remedies

conflicts with the congressional intent

to make ERISA remedies exclusive,

and any such state law cause of action

would be preempted. By its decision, the

Supreme Court made it clear that states

cannot enact statutes like the THLA in

order to circumvent ERISA preemption.

The Supreme Court also cautioned

courts not to distinguish between

preempted and non-preempted claims

based on the “labels affixed to them”

by litigants as this would “elevate form

over substance and allow parties to

evade” preemption. 58 Significantly, the

Supreme Court clarified, and expressly

limited, its prior holding in Pegram v.

Hendrich. It stated: “. . . the reasoning

in Pegram ‘only make[s] sense

where the underlying negligence also

plausibly constitutes medical treatment

by a party who can be deemed to be a

treating physician or such a physician’s

employer.” 59 Consequently, pursuant to

Davila, the recipients of medical benefits

can only pursue a “mixed eligibility/treatment”

malpractice case against

a party who is the treating physician or

that physician’s employer.

It did not take long for a court to look

to Davila for guidance in deciding

a FEHBA preemption decision in a

purported mixed eligibility/treatment

case. In McCoy v. Unicare Life and

Health Ins. Co., a Northern District of

Illinois federal court held that FEHBA

“completely preempted” a medical

Medical benefit claimants have historically had some success in avoiding

preemption by characterizing their claims as involving both questions

of eligibility for benefits and the appropriateness of medical care. Such

matters have been termed mixed eligibility and treatment cases.

malpractice action originally pled as a

mixed eligibility/treatment case under

Pegram. 60 In denying the plaintiff’s

motion to remand the case back to

state court, the court referenced the

Davila decision and ruled that the

plaintiff’s claims against the HMO and

its contracting Independent Physician

Association (“IPA”) were completely

preempted by FEHBA. This was the

first reported decision to apply FEHBA

preemption following the Supreme

Court’s Davila ruling. It is also one of

Sedgwick, Detert, Moran & Arnold LLP [ 5 ]


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An Overview of FEHBA and the Power of Its Preemption Continued

only a few reported cases finding that

FEHBA completely preempts a complaint

with medical malpractice or mixed

treatment/eligibility causes of action.

The plaintiff in McCoy filed a medical

malpractice lawsuit in the Circuit

Court of Cook County, Illinois, against

his HMO and the IPA that contracted

with the HMO to deliver benefits. He

alleged that these defendants denied

certain medical benefits for his burn

injuries. He contended that the managed

care defendants were negligent

by preventing him from obtaining

treatment at the burn center of his

choice and refusing to approve and/or

cover the costs for certain treatment

and occupational therapies. Plaintiff

maintained that this prevented him

from achieving a full recovery.

court denied plaintiff’s motion for remand,

finding that FEHBA “completely

preempts” plaintiff’s claim against the

HMO and IPA. 62 In so holding, the

court recognized that:

A plaintiff cannot circumvent the

clear intent of Congress to completely

preempt an area of law by

phrasing allegations so that they

appear to be malpractice allegations

and by omitting any reference to the

FEHBA. Regardless of titles and

jargon included in a complaint, if it

is clear from the facts in the action

that the allegations are essentially

contesting the eligibility of benefits

rather than treatment decisions,

then the claims should properly be

deemed what they truly are and the

court should not proceed under the

Pursuant to Davila, the recipients of medical benefits can only pursue

a “mixed eligibility/treatment” malpractice case against a party who

is the treating physician or that physician’s employer.

The court also specifically responded

to plaintiff’s attempt to characterize his

claim as one involving mixed plan eligibility

and treatment issues under the

Pegram decision. The court rejected

that contention since the Supreme

Court limited the ability of a claimant to

state a mixed eligibility and treatment

claim in Davila. 63 The court recognized

that a “mixed issues” claim is only applicable

to situations “where a referring

physician is making treatment decisions

while simultaneously owning or operating

the health plan which is also making

eligibility determinations.” 64 In the end,

the federal court in McCoy concluded

that the plaintiff “cannot artfully attempt

to plead around FEHBA, particularly

when, as in this instance, Congress has

indicated that the complete preemption

doctrine is applicable.” 65

At least one other court, Benoti v. First

Health, has looked to the decision in

McCoy for guidance when conducting

a FEHBA preemption analysis. 66

Consequently, it would appear that the

uncertainty surrounding preemption

under FEHBA that once existed for

certain claims may now be a thing of

the past. Based on the holding of

Davila, and the reasoning set forth

in McCoy, it is anticipated that courts

facing certain FEHBA preemption challenges

in the future are likely to reject

them and follow the analysis in McCoy.

The defendants removed the case

to federal court on the grounds that

FEHBA completely preempted and

barred plaintiff’s state law claims. In

response, plaintiff moved to remand

and argued that his amended complaint

alleged facts sufficient to

establish a mixed eligibility/treatment

decision that could proceed in state

court under Pegram. The defendants

responded that FEHBA completely preempts

the judicial review of all medical

benefit claims and argued that plaintiff

had improperly characterized his suit

as a medical malpractice action.

The Illinois federal court recognized

a lower court split on the issue of the

applicability of the complete preemption

doctrine to FEHBA. 61 However, the

pretense that the allegations are

legitimate malpractice claims.

McCoy, 2004 WL 2358277 at *5. The

court concluded that plaintiff’s claims

against the HMO, and the IPA that

contracted with the HMO to deliver

benefits, were completely preempted

by FEHBA.

Conclusion

FEHBA has established the largest

employer-sponsored group health insurance

program in the world. As such,

there are millions of plan participants

who must carefully navigate FEHBA’s

statutory scheme and the OPM regulations

to recover medical benefits

denied by participating carriers. Plan

participants have previously had some

success in being allowed to pursue

more expansive state law claims relying

upon the holding in Pegram by

characterizing their causes of action as

mixed eligibility/treatment claims. This

often allowed them to avoid the limited

judicial relief set forth under FEHBA.

However, the Supreme Court in Davila

has now severely limited the ability to

circumvent preemption. Davila restricts

[ 6 ] Sedgwick, Detert, Moran & Arnold LLP


the right of recipients of medical benefits

to pursue a “mixed eligibility treatment”

malpractice case only against

the patient’s treating physician or that

physician’s employer.

While the Davila decision interprets

preemption under ERISA, at least two

courts have found that the Supreme

Court’s preemption analysis applies

equally to FEHBA matters. This proposition

is supported by the fact that the

preemption clauses in ERISA and

FEHBA are nearly identical and serve

similar purposes. FEHBA’s underlying

legislative rationale also supports

complete preemption. As illustrated by

the decision of the Northern District of

Illinois in McCoy, courts have already

started to rely on Davila, at least in

part, to hold that a cause of action pled

as a medical malpractice or mixed

treatment/eligibility case is completely

preempted by FEHBA. It is anticipated

that others courts are likely to follow

this trend. Thus, when FEHBA insurers

and their subcontracting claims handlers

make decision about claims, they

should be immune from suits for state

law medical negligence. Consequently,

claimants who are dissatisfied with

the level of recovery they can achieve

under their FEHBA plan in the future

will likely need to find new ways to

avoid the broad reach of FEHBA and

the power of its preemption.

Footnotes

1

Fred A. Smith is a partner in the Chicago

office of Sedgwick, Detert, Moran & Arnold. He

is a member of the firm’s Healthcare Practice

Group, and his areas of specialty include

healthcare, ERISA, medical device and medical

malpractice litigation. He has defended healthcare

clients in a variety of settings including

class actions, products liability, physician termination

litigation and reimbursement disputes.

Before his legal career, Mr. Smith was the

Director of the Department of Respiratory Therapy

at the University of Chicago Hospitals and

Clinics. Besides his clinical practice, he was

involved in risk management with that allied

health field. He is a member of the American,

Illinois State and Chicago Bar Associations,

the Illinois Association of Healthcare Attorneys

and the Defense Research Institute (DRI). Fred

Smith can be reached at fred.smith@sdma.com

or (312) 641-9050.

2

David M. Goldhaber is special counsel in

Sedgwick’s Chicago office and a member of

the firm’s Healthcare Practice Group. In the

healthcare arena, he represents hospitals,

MCOs, healthcare professionals and life,

health and disability insurers in litigation matters

and related insurance coverage issues.

Mr. Goldhaber has successfully defended life,

health and disability claims, privilege disputes

and malpractice actions against physicians,

plan administrators and MCOs. He is a member

of the ABA Health Law Section, DRI, and the

Chicago Bar Association, where he served as a

Legislative Liaison for its Health Law Committee.

He can be reached at (312) 849-1961 or

david.goldhaber@sdma.com.

3

OFFICE OF PERSONNEL MANAGEMENT, FEHB

HANDBOOK (available at http://www.opm.gov/insure/handbook)

(last visited June 7, 2005).

4

See Botsford v. Blue Cross and Blue Shield

of Montana, Inc., 314 F.3d 390, 394 (9th Cir.

2002); Hayes v. Prudential Ins. Co. of America,

819 F.2d 921, 922 (9th Cir. 1987).

5

See Aetna Health, Inc. v. Davila, 542 U.S.

200, 124 S.Ct. 2488 (2004).

6

H.R. Rep. No. 86-957, at 1 (1959), reprinted

in 1959 U.S.C.C.A.N. 2913, 2914.

7

See 5 U.S.C. § 8901.

8

See Hayes v. Prudential Ins. Co. of America,

819 F.2d 921, 922 (9th Cir. 1987).

9

Blue Cross and Blue Shield of Illinois v. Cruz,

396 F.3d 793, 795 (7th Cir. 2005).

10

Id.

11

Pursuant to 5 U.S.C. § 8901(7), “’Carrier’

means a voluntary association, corporation,

partnership, or other nongovernmental organization

which is lawfully engaged in providing,

paying for, or reimbursing the cost of, health

services under group insurance policies or

contracts, medical or hospital service agreements,

membership or subscription contracts,

or similar group arrangements, in consideration

of premiums or other periodic charges payable

to the carrier, including a health benefits plan

duly sponsored or underwritten by an employee

organization.”

12

OFFICE OF PERSONNEL MANAGEMENT, FEHB

HANDBOOK, supra note 3.

13

The Health Maintenance Organization of

New Jersey, Inc. v. Whitman, 72 F.3d 1123,

1130 (3rd Cir. 1995) (citing 5 U.S.C. § 8906

(1994)).

14

See Hayes v. Prudential Ins. Co. of America,

819 F.2d 921, 922 (9th Cir. 1987) (“After OPM

negotiates changes with the carriers all federal

enrollees are permitted to switch enrollment

from one plan to another, regardless of their

state of health, during a period called ‘open

season.’ Each enrollee thus may obtain the

most beneficial plan but is not guaranteed the

same coverage in future years that had been

available the preceding year.”).

15

5 U.S.C. § 8913(a).

16

5 C.F.R. § 890.105(b) (1998).

17

Id. § 890.105(b)(2).

18

Id.

19

H.R. Rep. No. 459 (1983).

20

5 C.F.R. §§ 890.105(a)(1), (3) (1998).

21

See id. § 890.105(a).

22

Id. § 890.105(e)(1).

23

Id. § 890.105(e)(4).

24

Id. § 890.105(e)(2).

25

See id. § 890.105(e)(5). Such actions are

not typically taken by private carriers.

26

See 5 U.S.C. § 8902(j).

27

See 5 C.F.R. § 890.105(a)(1) (1998).

28

See id. § 890.107(c).

29

See id. § 890.107(c).

30

See id. §§ 890.107(c), (d).

31

See id. § 890.107(d).

32

See id. § 890.107(c).

33

See Harris v. Mutual of Omaha Cos., 992

F.2d 74, 79 (7th Cir. 1993)(concluding the

Administrative Procedure Act governs review

of final OPM decisions); Caudill v. Blue Cross

& Blue Shield, 999 F.2d 74, 79 (4th Cir.

1993)(same).

34

See, e.g., Bryan v. Office of Personnel

Management, 165 F.3d 1315 (10th Cir. 1999)

(affirming the district court’s denial of attorneys

fees to a claimant).

35

See, e.g., Metro. Life Ins. Co. v. Taylor, 481

U.S. 58, 62-64, 107 S.Ct. 1542 (1987) (holding

that employee’s state law claims were preempted

by ERISA and were therefore federal

causes of action).

36

Id.

37

H.R. Rep. No. 282, at 4 (1977).

38

Id.

39

5 U.S.C. § 8902(m)(1) (amended 1998).

40

See Haller v. Kaiser Found. Health Plan of

the Northwest, 184 F.Supp.2d 1040, 1046-48

(D. Or. 2001) (explaining that there is a spit

among the district courts and citing various

cases for both positions).

41

See, e.g., Blue Cross & Blue Shield of

Florida, Inc. v. Departmet of Banking and

Sedgwick, Detert, Moran & Arnold LLP [ 7 ]


S E D G W I C K | I N T H E N E W S | FA L L 2 0 0 5

An Overview of FEHBA and the Power of Its Preemption Continued

Fin., 791 F.2d 1501 (11th Cir. 1986) (Florida’s

Unclaimed Property Act preempted to the extent

it conflicts with federal employee benefit plan);

Myers v. United States, 767 F.2d 1072, 1074

(4th Cir. 1985) (state law which purports to allow

recovery of additional benefits not contemplated

by a federal insurance contract must be deemed

inconsistent with and preempted by FEHBA);

and Tackitt v. Prudential Ins. Co., 758 F.2d

1572, 1575 (11th Cir. 1985) (“the interpretation

of health insurance contracts is controlled by

federal, not state, law”).

42

See, e.g., Howard v. Group Hosp. Serv., 739

F.2d 1508, 1510-12 (10th Cir. 1984) (approving

state law interpretation of FEHBA plan); Eidler

v. Blue Cross Blue Shield United of Wisconsin,

671 F.Supp. 1213 (E.D. Wisc. 1987) (holding

that plaintiff’s state tort claim of bad faith is not

barred by FEHBA).

43

See, e.g., Hayes v. Prudential Ins. Co. of

America, 819 F.2d 921 (9th Cir. 1987).

44

See id. at 926; Blue Cross & Blue Shield, Inc.

v. Department of Banking & Fin., 791 F.2d 1501

(11th Cir. 1986).

45

See Brian Harr, Legislative Reform: FEHBA’s

Preemption Clause: Is It a Model for Private

Employers’ Subsidized Health Care, 22 J.

LEGIS. 267, 273 (1996) (“Since the courts have

been unable to agree upon what Congress’ true

intent was, Congress should amend section

8902(m)(1).”).

46

H.R. Rep. No. 105-374, at 9 (1998).

47

Id.

48

Wormack v. Southeastern Mutual Ins. Co.,

907 S.W.2d 163, 166 (Ky. Ct. App. 1995)

(quoting Caudill v. Blue Cross and Blue Shield

of North Carolina, 99 F.2d 74, 78-79 (4th Cir.

1993)).

49

ERISA’s preemption clause states: “the

Fred A. Smith can be reached at:

312.641.9050

One North Wacker Drive, Suite 4200

Chicago, IL 60606-2841

fred.smith@sdma.com

David M. Goldhaber can be reached at:

312.641.9050

One North Wacker Drive, Suite 4200

Chicago, IL 60606-2841

david.goldhaber@sdma.com

provision of this subchapter . . . shall supersede

any and all state laws insofar as they may now

or hereafter relate to any employee benefit plan

. . .” 29 U.S.C.

§ 1144(a).

50

See, e.g., Botsford v. Blue Cross and Blue

Shield of Montana, Inc., 314 F.3d 390, 397 (9th

Cir. 2002) (instructing the district court to dismiss

plaintiff’s claim under the Montana Unfair Trade

Practices Act with prejudice after concluding

that FEHBA completely preempted the state

law claim); Doyle v. Blue Cross Blue Shield of

Illinois, 149 F.Supp.2d 427, 432 (N.D. Ill. 2001)

(concluding that Congress clearly intended for

the terms of FEHBA plan contracts to completely

preempt state law causes of action relating to

health insurance or plans); Blue Cross and Blue

Shield of Illinois v. Cruz, 2003 WL 22715815

(N.D. Ill. 2003) (recognizing FEHBA preemption

for coverage and benefit claims); Kight v. Kaiser

Foundation Health Plan of the Mid-Atlantic

States, Inc., 34 F.Supp.2d 334, 337-340 (E.D.

Va. 1999) (recognizing that “[c]onsidering the

language of the statute and the legislative history,”

there can be no question that “Congress

has clearly manifested an intent to preempt

state law regarding the terms and benefits of

FEHBA plans” and holding that challenges to

benefit determinations, even when cast as state

law claims, fall within FEHBA’s civil enforcement

provisions); Rievely v. Blue Cross Blue Shield

of Tennessee, 69 F.Supp.2d 1028, 1032-36

(E.D. Tenn. 1999) (denying motion to remand

and finding removal proper based on FEHBA’s

preemption of state law claims).

51

See Pegram v. Herdrich, 530 U.S. 211, 120

S.Ct. 2143 (2000).

52

See Roach v. Mail Handlers Benefit Plan, 298

F.3d 847 (9th Cir. 2002).

53

Id.

54

Id. at 850.

55

Id. at 851.

56

See, e.g., Kincade v. Group Health Services

of Oklahoma, 945 P.2d 485 (Okla. 1997).

57

Linda Greenhouse, Justices Hear Arguments

About H.M.O. Malpractice Lawsuits, THE NEW

YORK TIMES (March 24, 2004).

58

Aetna Health, Inc. v. Davila, 542 U.S. 200,

331, 124 S.Ct. 2488 (2004).

59

Id. at 335.

60

See McCoy v. Unicare Life and Health Ins.

Co., 2004 WL 2358277, 34 Employee Benefits

Cas. 2047 (N.D.Ill. October 14, 2004).

61

The court cited Haller v. Kaiser Found. Health

Plan of the Northwest, 184 F.Supp.2d 1040,

1046-48 (D. Or. 2001 (explaining that there is a

spit among the district courts and citing various

cases for both positions).

62

The court followed the reasoning set forth

in Doyle v. Blue Cross Blue Shield of Illinois,

149 F.Supp.2d 427 (N.D. Ill. 2001) and Rievley

v. Blue Cross Blue Shield of Tennessee, 69

F.Supp.2d 1028 (E.D. Tenn. 1999). In both

cases, the courts analyzed the expansive

language included in FEHBA and noted that the

1998 amendment to the preemption clause.

63

Davila, 542 U.S. 200.

64

McCoy, 2004 WL 2358277 at 1.

65

Id. at 5.

66

Benotti v. First Health, No. DC-5853-04 (N.J.

Super. L. Div.) (finding the rationale expressed

in McCoy for complete preemption under

FEHBA to be persuasive).

This article first appeared in the American

Bar Association Health Law Section’s The

Health Lawyer (vol. 18, no. 1, October

2005). Copyright © 2005 American Bar

Association. Reprinted with permission.

Reproduced with permission. All rights

reserved. This information or any portion

thereof may not be copied or disseminated

in any form or by any means or downloaded

or stored in an electronic database or

retrieval system without the express written

consent of the American Bar Association.

© 2005 Sedgwick, Detert, Moran & Arnold

LLP. This communication is published as an

information service for clients and friends of

the firm and does not constitute the rendering

of legal advice or other professional

service.

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