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No. 98-1949: Pegram v. Herdrich

98-1949

In the Supreme Court of the United States

LORI PEGRAM, M.D., ET AL., PETITIONERS

v.

CYNTHIA HERDRICH

ON WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE SEVENTH CIRCUIT

BRIEF FOR THE UNITED STATES
AS AMICUS CURIAE SUPPORTING PETITIONERS




SETH P. WAXMAN
Solicitor General
Counsel of Record
EDWIN S. KNEEDLER
Deputy Solicitor General
JAMES A. FELDMAN
Assistant to the Solicitor
General
Department of Justice
Washington, D.C. 20530-0001
(202) 514-2217


HENRY L. SOLANO
Solicitor of Labor
ALLEN H. FELDMAN
Associate Solicitor
MARK S. FLYNN
Senior Appellate Attorney
Department of Labor
Washington, D.C. 20210




QUESTION PRESENTED

Whether respondent, an enrollee in a health maintenance organization (HMO)offered through an employee welfare benefit plan, states a claim of breachof fiduciary duty under the Employee Retirement Income Security Act of 1974,29 U.S.C. 1001 et seq., by alleging that the HMO has established an incentivearrangement under which a bonus is paid to physicians who (1) provide medicalcare in a manner that minimizes diagnostic tests and referrals to non-HMOfacilities and non-HMO physicians and (2) determine whether disputed andnon-routine health insurance claims are covered under the plan.




In the Supreme Court of the United States

No. 98-1949
LORI PEGRAM, M.D., ET AL., PETITIONERS
v.
CYNTHIA HERDRICH

ON WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE SEVENTH CIRCUIT

BRIEF FOR THE UNITED STATES
AS AMICUS CURIAE SUPPORTING PETITIONERS


INTEREST OF THE UNITED STATES

This case presents questions concerning the fiduciary status and dutiesunder the Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C.1001 et seq., of a health maintenance organization (HMO) that provides medicalcare to members enrolled through an employee welfare benefit plan and thatmaintains incentives for HMO physicians to implement cost-containment measures.The Secretary of Labor has primary responsibility for enforcing and administeringTitle I of ERISA, including its fiduciary duty provisions. 29 U.S.C. 1002(13),1136(b). Accordingly, the United States has a substantial interest in thecase. The United States has participated in many other ERISA cases in thisCourt, including cases that have addressed the nature and scope of fiduciaryduties under ERISA, such as Hughes Aircraft Co. v. Jacobson, 119 S. Ct.755 (1999); Lockheed Corp. v. Spink, 517 U.S. 882 (1996); Varity Corp. v.Howe, 516 U.S. 489 (1996); and Mertens v. Hewitt Associates, 508 U.S. 248(1993).


STATEMENT

1. State Farm Insurance Company maintains a Group Medical Health Plan (theState Farm Plan) for its employees, under which eligible employees may choosea group medical insurance plan or, "as an alternative health care choice,"a health maintenance organization (HMO). J.A. 101. Respondent Cynthia Herdrichis married to a State Farm employee who enrolled in an HMO, Carle Care HMO,offered under the State Farm Plan. Pet. App. 84a.
The Carle Care HMO is "a product of" petitioner Health AllianceMedical Plans (HAMP), a for-profit Illinois domestic stock insurance corporation.Pet. App. 84a, 93a. HAMP, in turn, is a wholly-owned subsidiary of petitionerCarle Clinic Association, an Illinois professional medical corporation ownedby its physician shareholders. HAMP contracts with Carle Clinic to furnishthe medical services provided by the HMO. Id. at 86a. The net effect ofthis arrangement is that the physicians who provide care through the HMOare also the owners of the HMO.

2. Respondent sought treatment for abdominal pain from petitioner LauriePegram, a Carle Clinic physician, who scheduled her for an ultrasound procedureeight days later at a distant hospital affiliated with the HMO. Pet. App.2a n.1, 23a-24a. Respondent's appendix ruptured in the interim, resultingin peritonitis. Id. at 2a n.1. Respondent then brought a two-count complaintin Illinois state court alleging medical negligence by Pegram and seekingto hold Carle Clinic liable under the doctrine of respondeat superior. Id.at 3a, 66a.
Subsequently, respondent amended her state court complaint to add a claim(Count III) against Carle Clinic, alleging that it violated the IllinoisConsumer Fraud and Deceptive Business Practices Act, 815 Ill. Comp. Stat.Ann. § 505/1 (West 1999), by failing to advise her of material factsregarding the ownership of HAMP and by failing to inform her that the compensationof the HMO's physicians was increased to the extent they did not order diagnostictests, did not utilize facilities not owned by Carle Clinic, and did notmake emergency or consultation referrals. Pet. App. 3a & n.2. She alsobrought a claim against HAMP (Count IV) alleging that by implementing thosecost-containment measures, HAMP breached its state-law duty of good faithand fair dealing. Ibid.
Petitioners removed the case to federal court, on the ground that CountsIII and IV were completely preempted by ERISA. Pet. App. 2a, 3a. The districtcourt thereupon ruled that both counts were preempted and granted summaryjudgment on Count IV, but it gave respondent leave to amend Count III. Id.at 80a.1
Respondent then amended Count III to assert the claim now at issue, i.e.,that HAMP and Carle Clinic breached fiduciary duties under ERISA.2 Respondentalleged that petitioners had the exclusive right to decide all disputedand non-routine claims under "the Plan," which she defined asthe Carle Care HMO,3 and exercised discretionary control of claims management,property management, and administration of "the Plan." Pet. App.85a.
On the basis of those factual allegations, respondent asserted that petitionersbreached fiduciary duties under Section 404 of ERISA, 29 U.S.C. 1104, becauseCarle Clinic physicians receive a year-end distribution paid out of "supplementalmedical expense payments" that HAMP and CHIMCO pay to Carle Clinicbased on contractual provisions requiring the physicians to minimize theuse of diagnostic tests, of facilities not owned by Carle Clinic, and ofreferrals to "non-contracted" physicians. Pet. App. 85a-86a. Respondentalso asserted that petitioners sought to fund the year-end payments by "administeringdisputed and non-routine health insurance claims," and determining,e.g., "which claims are covered under the Plan and to what extent"and "what the applicable standard of care is." Id. at 86a. Respondentalleged that "the Plan" had been wrongfully deprived of amountscomprising the supplemental medical expense payments made by HAMP and CHIMCOto Carle Clinic and sought an order requiring reimbursement by Carle Clinicof the supplemental medical expense payments received from HAMP and CHIMCOas well as such other equitable relief as the court deemed just. Id. at87a.
Petitioners moved to dismiss amended Count III under Federal Rule of CivilProcedure 12(b)(6) for failure to state a claim upon which relief can begranted. The district court granted the motion on the ground that respondenthad "fail[ed] to identify how any of the [petitioners] is involvedas a fiduciary to the Plan." Pet. App. 63a (magistrate's report); seeid. at 59a-60a (adopting magistrate's report). Respondent's state-law medicalmalpractice claims were then tried to a jury, which rendered a $35,000 verdictin her favor. Id. at 6a, 81a-82a. After entry of final judgment, respondentappealed the dismissal of her ERISA fiduciary breach claim.

3. a. A divided panel of the court of appeals reversed. Pet. App. 1a-38a.The panel majority held that respondent had adequately alleged that petitionerswere fiduciaries. Id. at 11a-15a. Noting that the complaint alleges thatpetitioners "have the exclusive right to decide all disputed and non-routineclaims under the plan," the court concluded that "this level ofcontrol satisfies ERISA's requirement that a fiduciary maintain 'discretionarycontrol and authority.'" Id. at 14a (emphasis omitted).
The panel majority also held that respondent's allegations, if acceptedas true, were sufficient to demonstrate that petitioners breached theirfiduciary duty because they acted in their own interest, rather than "withan eye single to the interests of the [plan's] participants and beneficiaries."Pet. App. 16a (quoting Donovan v. Bierwirth, 680 F.2d 263, 271 (2d Cir.),cert. denied, 459 U.S. 1069 (1982)). The court noted that the complaintalleged that the plan "dictated that the very same HMO administratorsvested with the authority to determine whether health care claims wouldbe paid, and the type, nature, and duration of care to be given, were thosephysicians who became eligible to receive year-end bonuses as a result ofcost-savings," thus creating the incentive for them to limit treatmentto ensure a larger bonus. Id. at 18a-19a (emphasis omitted).
The majority stated that it was not adopting a per se rule "that theexistence of incentives automatically gives rise to a breach of fiduciaryduty," but only that such "incentives can rise to the level ofa breach where, as pleaded here, the fiduciary trust between plan participantsand plan fiduciaries no longer exists." Pet. App. 20a. Addressing thedissent's view that imposition of incentives to limit care should constitutea fiduciary breach only when there is a "serious flaw" in themanner in which the incentive arrangement is established, the majority concludedthat there was such a flaw in that the "physician/owners of Carle ** * simultaneously control the care of their patients and reap the profitsgenerated by the HMO through the limited use of tests and referrals."Id. at 21a (emphasis omitted). The majority referred to the treatment ofrespondent's appendicitis as an example of the effects of the incentivescheme, id. at 24a, 32a-33a, and expounded its view that managed care ishaving a deleterious effect on the quality of health care in this country,id. at 24a-33a.
Finally, the majority concluded that respondent alleged a loss to the planattributable to the petitioners' alleged breach, in that the plan was deprivedof the amounts paid as incentives. Pet. App. 38a. Accordingly, the majorityconcluded that respondent had alleged the requisite elements of a claimfor fiduciary breach under ERISA.

b. Judge Flaum dissented. Pet. App. 38a-47a. In his view, respondent's allegationsabout the structural incentives for cost containment did not in themselvesmake out a case of fiduciary breach, because ERISA tolerates some conflictof interest on the part of ERISA fiduciaries, as by permitting the employeror plan sponsor's officer or employee to serve as fiduciary. Id. at 40a.The mere existence of such incentives was not enough, in his view, to establisha fiduciary breach because market forces protect the interests of beneficiariesby making it unlikely that the HMO would wish to alienate the employer-sponsorby maintaining an unduly restrictive approach to coverage. Id. at 40a-42a.Moreover, Judge Flaum stated his concern that the majority's decision wouldlead to "untethered judicial assessments of permissible incentive levelsin health care plans." Id. at 44a.

4. The court of appeals denied rehearing en banc. Pet. App. 48a-49a. JudgeEasterbrook, joined by three other judges, filed an opinion dissenting fromthe denial of rehearing. Id. at 49a-58a. Judge Easterbrook concluded thatCarle Care's decision to establish one set of cost-saving incentives ratherthan another is not an exercise of discretion in the administration of theemployee benefit plan, but rather is an exercise of discretion by CarleCare in providing medical services. Id. at 52a-53a. He deemed respondent'scomplaint to allege that the benefit offered by State Farm to its employeeswas the Carle Care HMO, in which petitioners are acting as suppliers ofa service to the plan, not plan fiduciaries. Id. at 56a. Judge Easterbrookalso stated that in his view the majority's rule was "impossible tocabin, for the plan attacked in this case is an ordinary HMO." Id.at 56a.

INTRODUCTION AND SUMMARY OF ARGUMENT

The Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. 1001et seq., "was enacted 'to promote the interests of employees and theirbeneficiaries in employee benefit plans,' * * * and 'to protect contractuallydefined benefits.'" Firestone Tire & Rubber Co. v. Bruch, 489 U.S.101, 113 (1989). The statute thus does not "requir[e] employers toprovide any given set of minimum benefits, but instead controls the administrationof benefit plans, * * * as by imposing reporting and disclosure mandates,* * * participation and vesting requirements, * * * funding standards, ** * and fiduciary responsibilities for plan administrators." New YorkState Conference of Blue Cross & Blue Shield Plans v. Travelers Ins.Co., 514 U.S. 645, 651 (1995). Among the various duties that ERISA imposeson fiduciaries of employee benefit plans is a duty of loyalty, under whicha "fiduciary shall discharge his duties with respect to a plan solelyin the interest of the participants and beneficiaries." 29 U.S.C. 1104(a)(1);see also 29 U.S.C. 1104(a)(1)(A)(i).
The court of appeals held that respondent stated a claim of breach of theduty of loyalty owed by a fiduciary by alleging that petitioners providedprofit-based financial incentives for HMO physicians. Liberally read, asthey must be in the context of a motion to dismiss for failure to statea claim, Conley v. Gibson, 355 U.S. 41 (1957), respondent's allegationschallenge a bonus ("year-end distribution") allegedly paid bypetitioner HAMP to Carle Clinic physicians that is "fund[ed]"by profits derived from two types of conduct. Pet. App. 86a. The first typeis the provision of medical services by "owner/physicians" whoallegedly "minimize the use of diagnostic tests," "minimizethe use of facilities not owned by Carle," and "minimize the useof emergency and non-emergency consultation and/or referrals" to non-HMOphysicians. Ibid. The second type is "administering disputed and non-routinehealth insurance claims." Ibid.
The first of these allegations-the "treatment" allegations-failsto state a claim because it does not allege conduct by petitioners in theircapacity as ERISA fiduciaries. An HMO acts as a medical care provider, ratherthan an ERISA fiduciary, when it establishes and implements an arrangementfor paying its physicians to treat their patients, even if the arrangementincludes incentives for using less costly treatment regimens. If the courtof appeals were correct that the law of fiduciary duty under ERISA governedthe treatment of patients by HMO doctors, then traditional state regulationof the practice of medicine-along with traditional state-law malpracticeand professional licensing regulations-would necessarily be preempted insofaras they applied to ERISA plans. In Travelers and subsequent cases, thisCourt has rejected that overly expansive view of ERISA's scope, and it shoulddo so again here.
By contrast, the activities involved in the second set of allegations-the"administration" allegations-may involve conduct by petitionersas ERISA fiduciaries, because an entity such as an HMO that exercises discretionin determining whether claims for specific benefits are covered by an ERISAplan is an ERISA fiduciary. Respondent, however, has alleged only that petitionersgenerate income by performing their roles as fiduciaries under ERISA. Thatallegation is insufficient to state a claim of breach of fiduciary dutyunder ERISA, because fiduciaries under ERISA are expected to be compensatedfor the performance of their duties. Cf. 29 U.S.C. 1108(c). Indeed, evenif the complaint could be read to include an allegation that petitionersemploy a profit-based system that permits those who assist in claims administrationto share in the petitioners' general profits, it would still fail to statea claim of breach of fiduciary duty under ERISA. Unlike an incentive schemein which claims administrators are directly paid for denying (but not forallowing) claims, a general profit-based compensation arrangement does notin itself conflict with the duties owed by fiduciaries under ERISA. Becausenone of respondent's allegations therefore states a claim of breach of fiduciaryduty under ERISA, the decision of the court of appeals should be reversed.

ARGUMENT

A. An HMO Is Not Itself An ERISA Plan, Although It May Function At VariousTimes As The Provider Of Medical Services To Such A Plan Or As Administrator,And Therefore Fiduciary, Of Such A Plan

1. In order to determine whether an entity acts as an ERISA fiduciary, itis critical to distinguish between the ERISA plan itself (the administrationof which by either the plan sponsor or an outside entity confers fiduciarystatus on an individual or other entity) and a provider of services to theplan (usually an independent entity not subject to ERISA's fiduciary dutystandards). ERISA defines an "employee welfare benefit plan" as"any plan, fund, or program * * * established or maintained by an employer* * * for the purpose of providing for its participants or their beneficiaries,through the purchase of insurance or otherwise, * * * medical, surgical,or hospital care or benefits" or other benefits. 29 U.S.C. 1002(1).Based on that definition, the essentials of a plan have been interpretedto be the existence of "intended benefits, a class of beneficiaries,[a] source of financing, and procedures for receiving benefits." Donovanv. Dillingham, 688 F.2d 1367, 1373 (11th Cir. 1982); accord Grimo v. BlueCross/Blue Shield, 34 F.3d 148, 151 (2d Cir. 1994); Kenney v. Roland ParsonContracting Corp., 28 F.3d 1254, 1257-1258 (D.C. Cir. 1994) (collectingcases).

2. In this case, the ERISA plan was the arrangement by which State FarmInsurance, respondent's husband's employer, undertook to provide medicalcare benefits to eligible employees and their families. See J.A. 51-52,101 (Summary Plan Description of State Farm Group Medical Health Plan, whichincludes a group medical insurance option and HMO options). As to employeeswho opt for the Carle Care HMO option, the plan consists of the documentsgoverning State Farm's purchase from HAMP of memberships in the HMO, andthe "intended benefit[]," Dillingham, 688 F.2d at 1373, underthe ERISA plan is coverage for the specific kinds of medical care and treatmentspecified in the subscription agreement between State Farm and the HMO,Pet. App. 89a-128a. That care in turn is provided by the doctors employedby the HMO. The HMO and its parent entities are thus service providers tothe ERISA plan; they are not themselves ERISA plans.

3. Because the HMO and its parent entities are not themselves ERISA plans,not all the acts that constitute management of the HMO are acts that constituteadministration of an ERISA plan, to which ERISA fiduciary duties may attach.4To the contrary, in determining whether an HMO is acting as a fiduciary,two major roles in which an HMO typically acts must be distinguished. AnHMO typically performs (at least) two distinct functions in the contextof an employee welfare benefit plan-providing medical services to beneficiariesand administering certain aspects of the plan. See, e.g., In re U.S. Healthcare,Inc., No. 98-5222, 1999 WL 728474, at *8 (3d Cir. Sept. 16, 1999); Dukesv. U.S. Healthcare, Inc., 57 F.3d 350, 361 (3d Cir.), cert. denied, 516U.S. 1009 (1995).5 Those functions lead to differing conclusions regardingan HMO's status as an ERISA fiduciary.
a. Insofar as an HMO is a provider of medical services, it is no more subjectto ERISA fiduciary duty standards than is any other provider of servicesto an ERISA plan. Under ERISA, a person is a fiduciary if "he exercisesany discretionary authority or discretionary control respecting managementof [an ERISA] plan * * * or control respecting management or dispositionof its assets," if "he renders investment advice * * * with respectto any moneys or other property of such plan," or if "he has anydiscretionary authority or discretionary responsibility in the administrationof [the ERISA] plan." 29 U.S.C. 1002(21)(A). A provider of medicaltreatment to a patient does not fall within any of those categories. Accordingly,an HMO, in its role as provider of medical treatment to patients who arebeneficiaries of ERISA plans, is not an ERISA fiduciary.6
Were it otherwise, ERISA would threaten to carve out an enormous hole intraditional state regulation of the practice of medicine and other analogousprofessions. For if ERISA fiduciary duty obligations governed HMOs in theircapacity as providers of medical treatment to patients covered by ERISAplans (as opposed to their capacity as claims administrators, for example),then state laws that govern the same thing-the practice of medicine by HMOs-wouldnecessarily "relate to" ERISA plans and would be preempted underSection 514(a) of ERISA, 29 U.S.C. 1144(a). Indeed, the clearest cases ofpreemption under ERISA occur when a state law attempts to impose standardson an entity that differ from those imposed by ERISA. See, e.g., Boggs v.Boggs, 520 U.S. 833, 841 (1997) (holding state community property law preemptedbecause it "conflicts with the provisions of ERISA or operates to frustrateits objects"); Ingersoll-Rand Co. v. McClendon, 498 U.S. 133, 142 (1990)(state-law cause of action for wrongful discharge to avoid pension obligation"conflicts directly" with ERISA causes of action and is thereforepreempted).7 The courts of appeals, however, have correctly held that statelaws governing the practice of medicine by HMOs are not preempted by ERISA.8As this Court explained in De Buono v. NYSA-ILA Medical & Clinical ServicesFund, 520 U.S. 806, 814 & n.10 (1997), the fact that a state law isa "regulation of matters of health and safety" "supportsthe application of the 'starting presumption' against pre-emption."
Moreover, if the provision of medical treatment to patients by an HMO weregoverned by ERISA fiduciary obligations, a single HMO doctor would be subjectto ERISA fiduciary obligations in treating members of the HMO who are ERISAbeneficiaries and differing state-law obligations in treating other membersof the same HMO. Similarly, HMO physicians who treat ERISA beneficiarieswould be subject to fiduciary obligations, while physicians who treat ERISAbeneficiaries under a traditional fee-for-service health insurance systemwould be subject to the quite distinct obligations imposed by state law.Indeed, respondent's own ability to pursue her state-law malpractice claimagainst Dr. Pegram and against Carle Clinic as Dr. Pegram's employer-asshe successfully did in the district court in this case, see Pet. App. 81a-wouldbe open to serious question. "There is not so much as a hint * * *that Congress intended to squelch * * * state efforts" to regulatethe practice of medicine when it included fiduciary duty provisions in ERISA.Travelers, 514 U.S. at 665.

b. The fact that an HMO does not act as an ERISA fiduciary when it providesmedical treatment to patients, however, does not mean that an HMO neveracts as an ERISA fiduciary. This Court explained in Varity Corp. v. Howe,516 U.S. 489 (1996), that a "'person is a fiduciary with respect toa plan,' and therefore subject to ERISA fiduciary duties, 'to the extent'that he or she 'exercises any discretionary authority or discretionary controlrespecting management' of the plan, or 'has any discretionary authorityor discretionary responsibility in the administration' of the plan."Id. at 498 (quoting 29 U.S.C. 1002(21)(A) (emphasis added)). In Varity,for example, since "obviously, not all of [the employer's] businessactivities involved plan management or administration," the Court hadto determine whether the employer was "wearing its 'fiduciary' * ** hat" when it made the particular representations that were allegedto constitute a fiduciary breach. 516 U.S. at 498. See also Hughes AircraftCo. v. Jacobson, 119 S. Ct. 755, 763 (1999); Lockheed Corp. v. Spink, 517U.S. 882, 887 (1996).
Varity, Hughes, and Lockheed establish that an entity may become an ERISAfiduciary when it performs particular functions, even if it acts as an independententity subject to state law (such as a provider of medical services to anERISA plan and ERISA beneficiaries) in many other of its activities. Inparticular, insofar as an HMO exercises "discretionary authority ordiscretionary responsibility in the administration of [the plan],"it takes on fiduciary status under ERISA. 29 U.S.C. 1002(21)(A). Activitiesthat constitute "administration of [the plan]" include "determiningthe eligibility of claimants, calculating benefit levels, making disbursements,monitoring the availability of funds for benefit payments, and keeping appropriaterecords * * * to comply with applicable reporting requirements." FortHalifax Packing Co. v. Coyne, 482 U.S. 1, 9 (1987). In the context of anHMO, the relevant administrative functions frequently performed by an HMOconsist of determining eligibility under the ERISA plan, determining whethera particular treatment is covered by the plan, sending required noticesand filing reports, and keeping necessary records. An HMO is an ERISA fiduciaryonly when and insofar as it exercises discretionary control over those activities.9

4. Because an HMO frequently combines under one roof non-fiduciary functions(such as the provision of medical treatment) and fiduciary functions (suchas the determination of whether particular medical services are an "intendedbenefit" under the ERISA plan), it sometimes can be difficult at themargins to sort out when an HMO is acting as an ERISA fiduciary and whenit is not. In this case, in determining whether respondent's complaint hasalleged a breach of fiduciary duty under ERISA, it is necessary to examinecarefully the allegations of respondent's complaint, in order to determinewhether they allege conduct by petitioners in their capacity as providersof medical services to the ERISA plan and its beneficiaries, or in theircapacity as ERISA fiduciaries.

B. Petitioners Were Not Acting As Fiduciaries Under The "Treatment"Allegations Of The Complaint, Because They Allege Only Conduct That PetitionersUndertook As Providers Of Medical Services

1. The "treatment" allegations of the complaint in this case-referringto the year-end payments to physicians who minimize the use of diagnostictests and the referral of patients to outside facilities and physicians-concernonly the way in which the HMO performs the medical services it is contractuallyobligated to perform for the ERISA plan and its beneficiaries. They relateto the medical treatment that HMO physicians provide to their patients,and the way in which HMO physicians are reimbursed for providing such treatment.The court of appeals therefore erred in holding that either the HMO or itsparent entities were acting in a fiduciary capacity under the "treatment"allegations of the complaint.

2. There could be no basis to argue that, although the HMO's medical treatmentof patients is governed not by ERISA but by state law, the HMO's decisionsregarding how to compensate its physicians who treat patients are subjectto ERISA's fiduciary duty standards. See U.S. Healthcare, 1999 WL 728474,at *10 (HMO acted in capacity of "providing and arranging medical services"when it adopted policies that encourage physicians to implement hospitaldischarge and admittance policies); Dukes, 57 F.3d at 353, 360-361 (state-lawclaim that HMO was negligent in its "selection, employment, and oversightof the medical personnel who performed the actual medical treatment"relates to HMO's role as arranger of medical care, and not to HMO's ERISAadministration function) (emphasis added). The permissible scope of a State'sregulation of medical care clearly extends beyond the direct regulationof the quality of treatment provided by a doctor to a patient and includesas well the means of compensation by which a doctor may be reimbursed forproviding care to patients.10 Cf. De Buono, 520 U.S. at 814 & n.10 (traditionalstate "regulation of matters of health and safety" includes taxationof hospitals). As noted above, if ERISA fiduciary standards govern the compensationarrangements for doctors who treat ERISA patients, then state laws thatregulate the same subject matter would be preempted. It would be perverseto argue that state law may govern the quality of medical care providedby HMO physicians to their patients, but it cannot govern the compensationarrangements under which such physicians are reimbursed and which the Statemay find affect the treatment decisions made by physicians.11
Indeed, if the HMO's business decisions, such as how to compensate physiciansfor their treatment of patients, were subject to ERISA fiduciary duty provisions,it is difficult to understand how the HMO could function as a business entity.As a business entity, HAMP has a financial incentive to arrange for medicalcare at the least expense to itself; that interest would conflict with itsduty as a fiduciary to act solely in the interests of the participants andbeneficiaries under ERISA Section 404(a)(1)(A), 29 U.S.C. 1104(a)(1)(A).In determining how to compensate its doctors, HAMP would thus be requiredto forgo consideration of costs, so that it could act solely in the participants'interests. Ibid. There is nothing in ERISA that suggests that Congress intendedto place that kind of restraint on an HMO's business activities.
Furthermore, if ERISA's fiduciary duty provisions were generally applicableto an HMO's compensation of its physicians for treating ERISA beneficiaries,it would have been unnecessary for Congress to have amended ERISA specificallyto address the question of incentives for the containment of medical treatment,as it has done in certain specific areas. In 1996, Congress enacted theNewborns' and Mothers' Health Protection Act, Pub. L. No. 104-204, §603, 110 Stat. 2935, which amended ERISA to prohibit any "group healthplan" or "health insurance issuer offering group health insurancecoverage in connection with a group health plan" from offering incentivesto an attending medical provider to provide care inconsistent with the statutorilyspecified two-day or four-day minimum length of hospital stay for a motherand newborn child. 29 U.S.C. 1185(b)(4) (Supp. III 1997). Significantly,a "group health plan" subject to the Act is essentially definedas an ERISA plan "providing medical care," 29 U.S.C. 1191b(a)(1)(Supp. III 1997), while a "health insurance issuer" is separatelydefined as "an insurance company, insurance service, or insurance organization(including a health maintenance organization * * *)," 29 U.S.C. 1191b(b)(2)(Supp. III 1997). In addition, in 1998, Congress passed the Women's Healthand Cancer Rights Act, Pub. L. No. 105-277, § 902(a), 112 Stat. 2681-437(to be codified at 29 U.S.C. 1185b(c)(2)), which similarly prohibits any"group health plan" or "health insurance issuer" fromproviding incentives to induce any provider to provide care in a mannerinconsistent with its requirements.12 Congress's adoption of those provisionsexpressly prohibiting health insurance carriers and HMOs that cover ERISAhealth plans from employing certain types of incentives for the containmentof medical costs indicates that ERISA's general fiduciary duty provisionswere not intended to govern that conduct.13

C. The "Administration" Allegations Of The Complaint Do StateA Claim That Petitioners Were Acting In A Fiduciary Capacity, But They AllegeConduct That Does Not, As A Matter Of Law, Violate Any Fiduciary Duty UnderERISA

1. In addition to alleging that financial incentives exist for physiciansto minimize diagnostic tests and certain referrals in the course of providingmedical care, respondent's complaint alleges that petitioners maintain acompensation scheme in which a financial incentive exists for determiningclaims. Although the complaint is not a model of clarity, respondent appearsto allege that Carle Care physicians receive year-end payments that arefunded by having physicians "determin[e] * * * which claims are coveredunder the Plan and to what extent," including, for example, determining"whether a course of treatment is experimental" or a "medicalcondition is an emergency." Pet. App. 86a. Those allegations couldencompass a situation in which a Carle Care physician has discretionaryauthority to determine a question of coverage under the plan, as for exampleby resolving a grievance challenging a Carle Care decision not to pay forcare that a beneficiary had already received at a non-Carle Care facility,on the ground that the episode had not been an emergency. See id. at 107a,125a.14 Insofar as the complaint could be read to allege discretionary conductin claims administration, it alleges conduct by petitioners in their capacityas ERISA fiduciaries.
In a long and consistent line of decisions under ERISA's preemption provision,29 U.S.C. 1144, this Court has recognized that the processing of claimsfor benefits by an insurer is a plan function. In New York State Conferenceof Blue Cross & Blue Shield Plans v. Travelers Insurance Co., 514 U.S.645, 658 (1995), for example, the Court noted that state laws that are preemptedbecause they "relate[] to" employee benefit plans include thosethat "mandat[e] employee benefit structures or their administration."Similarly, the Court's decision last Term in UNUM Life Insurance Co. v.Ward, 119 S. Ct. 1380 (1999), that a state-law rule regarding claims processingby an insurer is saved by ERISA's insurance savings clause was necessarilybased on the proposition that the state-law rule "related to"the ERISA plan. See 119 S. Ct. at 1386 (noting parties' agreement on thatpoint). And in Pilot Life Insurance Co. v. Dedeaux, 481 U.S. 41, 47-48 (1987),the Court began its analysis of the question whether the causes of actionthere were preempted by noting that the plaintiff's common-law causes ofaction against an insurer for "bad faith" claims processing ofthe plaintiff's disability claim under an ERISA plan "relate to"the ERISA plan.
Those preemption decisions establish that, because claims processing isa plan function even when performed by insurance companies or other entitiesthat are separate from the plan itself, state laws that attempt to regulateclaims processing under ERISA plans are preempted (unless saved by ERISA'sinsurance savings clause, see UNUM, 119 S. Ct. at 1386-1391). Therefore,insurers that process claims under ERISA plans are performing a plan-administrationfunction when they do so. And insofar as adjudicating claims involves theexercise of some discretion, insurers that engage in the administrationof ERISA plans by performing claims processing are acting as ERISA fiduciarieswhen they do so.15 Because there is no reason to distinguish between traditionalfee-for-service insurers and HMOs in any of these respects, it follows thatHMOs may act as ERISA fiduciaries when they engage in claims administrationunder an ERISA plan.16
The Department of Labor's claims-processing regulations similarly establishthat the processing of claims is an essential plan function. See 29 C.F.R.2560.503-1. Those regulations further recognize that claims processing maybe done by an insurer, 29 C.F.R. 2560.503-1(c), that a plan's claims proceduresmay provide that claims for benefits must be filed with "an insurancecompany, insurance service, or other similar organization," 29 C.F.R.2560.503-1(d)(3), and that such organization may be designated to providenotice of denial of a claim to a beneficiary, 29 C.F.R. 2560.503-1(f). Ofparticular significance here, the regulations provide that, with respectto plans in which benefits are provided by "an insurance company, insuranceservice, or other similar organization," the plan may provide thatsuch organization "shall be the 'appropriate named fiduciary'"for purposes of deciding appeals from denied claims. 29 C.F.R. 2560.503-1(g)(2).The regulations furthermore provide that claims procedures specified inthe Public Health Service Act, 42 U.S.C. 300e, are sufficient to satisfyERISA requirements "with respect to any benefits provided through membershipin a qualified health maintenance organization," 29 C.F.R. 2560.503-1(j).They thus make clear that HMOs, like other health insurance entities, engagein the administration of ERISA plans when they process claims.17

2. For the foregoing reasons, we disagree with Judge Easterbrook's suggestion,dissenting from denial of rehearing en banc, that "the Carle Care HMOsystem [is] the benefit promised by the ERISA plan," not the "particularmedical services" offered by the HMO. Pet. App. 55a. That suggestionwould place HMO coverage in an entirely different regulatory category fromother forms of health coverage, such as traditional health insurance. ThisCourt's decisions in Pilot Life and UNUM establish that the benefit offeredin a traditional insured ERISA plan is not the insurance policy, but thespecific benefits offered under the insurance policy; because the processingof claims for particular benefits is a subject addressed by ERISA, the statelaws governing claims processing in those cases "related to" ERISAplans. Yet, if Judge Easterbrook's rule were adopted, the rule would beprecisely the opposite in the case of an HMO. There is no reason why thescope of ERISA's coverage- and, correspondingly, of state law's application-shouldvary so widely depending on whether an ERISA plan offers traditional healthinsurance coverage or HMO coverage instead.
Moreover, Judge Easterbrook's proposal would have serious consequences forthe operation of HMOs. For example, this Court's decision in Pilot Lifewas based on the premise that a state-law claim for "bad faith"processing of claims by an insurer under an ERISA plan is preempted, becausesuch a claim "relates to" the ERISA plan. But if the "intendedbenefit," see p. 10, supra, of the ERISA plan is simply membershipin an HMO, then the only "claims processing" that would occurunder ERISA with respect to the HMO is the processing of claims that anindividual is entitled to enroll in the HMO; claims for particular medicalbenefits would not be claims for benefits under the ERISA plan, but wouldrather be internal matters between the HMO and its members. It follows thatstate laws governing the processing of claims for particular medical benefitswould govern that area entirely, including state law provisions permittingcompensatory and punitive damages and other remedies not permitted by ERISA.
Congress currently has before it a variety of proposals that would eliminateERISA preemption of state-law causes of action for damages (including, insome cases, punitive damages) by ERISA beneficiaries against HMOs and othergroup health plans. For example, H.R. 2990, a bill recently passed by theHouse of Representatives, see 146 Cong. Rec. H9523-01 (daily ed. Oct. 7,1999), would eliminate preemption of such damages actions "in connectionwith the provision of insurance, administrative services, or medical servicesby [a] person to or for a group health plan * * * or * * * that arises outof the arrangement by [a] person for the provision of such insurance, administrativeservices, or medical services by other persons." H.R. 2990, 106th Cong.,1st Sess. § 1302(a) (1999).18 It is a premise of the House bill thatERISA currently operates to restrict such state-law causes of action, becausethey would regulate benefits decisions under ERISA. Under Judge Easterbrook'sreading, however, any such legislative change would be unnecessary, sincedecisions by HMOs regarding whether particular medical benefits are coveredwould not be decisions concerning the benefits due under an ERISA plan andwould therefore not be subject to preemption under ERISA. Any such far-reachingchange should be enacted by Congress, not by judicial fashioning of an artificiallynarrow definition-apparently applicable only to HMOs and not to traditionalinsurers-of the "intended benefits" offered under an ERISA plan.

3. Because processing of claims for medical benefits- whether undertakenby the plan sponsor, a traditional fee-for-service insurer, or an HMO-isa function of ERISA plan administration, any individual or entity that exercisesdiscretion in the processing of such claims is an ERISA fiduciary. And tothe extent the complaint in this case alleges that Carle Care physiciansmake discretionary decisions in deciding claims, it has alleged conductthat is fiduciary in nature. Cf. Corcoran v. United Healthcare, Inc., 965F.2d 1321, 1331-1332 (5th Cir.) (decision that a particular benefit is notcovered by the plan involves plan administration, even though there is amedical component to the decision), cert. denied, 506 U.S. 1033 (1992);see generally 29 C.F.R. 2509.75-8 (determining benefit eligibility willinvolve fiduciary status if discretion is exercised, i.e., if it involvesmore than "ministerial functions * * * within a framework of policies,interpretations, rules, practices and procedures made by other persons").Indeed, petitioners appear to have acknowledged that fiduciary status anda duty of loyalty apply in such a context, stating that in contrast to theHMO's cost-containment and other business decisions, the HMO "mustmake coverage and eligibility decisions under the plan with an 'eye single'to the interests of the patient/beneficiaries." Pet. 28. Similarly,in their reply brief at the certiorari stage, petitioners stated that they"freely acknowledge that they are plan fiduciaries when they engagein activities denominated as fiduciary by ERISA, e.g., when they provideinformation to participants as required under ERISA and when they make decisionsabout who is eligible for plan benefits." Pet. Reply Br. 7 (emphasisadded).
The "administrative" allegations in the complaint, if liberallyconstrued, could be read to allege conduct by petitioners in their fiduciarystatus. Those allegations state that petitioners "administer[] disputedand non-routine health insurance claims." Pet. App. 86a. Specifically,the complaint alleges that petitioners "determin[e] * * * which claimsare covered under the Plan" and several other issues that are determinativeof coverage, such as "what the applicable standard of care is,""whether a course of treatment is experimental," "whethera course of treatment is reasonable and customary," and "whethera medical condition is an emergency." Ibid. Because those specificallegations are phrased in terms of "administering" the plan,rather than providing medical care, we do not read them to refer to a treatingphysician's determination of how to treat a patient, whether a course oftreatment is sufficiently proven to be safe, or whether an emergency existsthat calls for the use of particular medical emergency protocols. Rather,we read those allegations to refer to the claims administration processwithin the HMO, which is triggered when individuals (or, perhaps, treatingphysicians) seek determination of whether particular medical services arecovered by the plan. Insofar as the complaint alleges that petitioners actin the role of claims decisionmakers, the complaint therefore alleges thatthey act as ERISA fiduciaries. See also J.A. 102 (Summary Plan Descriptionof State Farm Group Medical Health Plan) ("Although State Farm * ** is the Plan Administrator and Plan Sponsor * * *, any and all benefitdeterminations will be made by each individual HMO.").

4. Although the complaint does allege that petitioners act as ERISA fiduciariesinsofar as they make determinations concerning benefits under the ERISAplan, the question remains whether the complaint adequately alleges theexistence of an incentive scheme that would constitute a violation of theduty of loyalty in the context of exercising that particular fiduciary responsibility,i.e., of deciding benefit claims.
In our view, the fact that a denial of coverage by a Carle Care physicianrepresents a cost saving for the HMO and that this same physician has someownership interest in the HMO would not in itself establish a fiduciarybreach. Under typical arrangements for employee benefit plans, such as aninsured health plan where the insurance company has discretionary authorityto decide claims, or a plan under which a company employee has such authorityand the employer pays claims out of its own assets, there is some measureof divided loyalty on the part of a claims decisionmaker. ERISA, however,tolerates the level of divided loyalty that is intrinsic to those commonarrangements, so that ERISA plans will be created and insurance companiesand others will find it practical to work for them. Cf. 29 U.S.C. 1108(c)(party-in-interest may serve as fiduciary).19 The mere existence of sucha potential conflict is not therefore a basis for a claim of breach of fiduciaryduty.
On the other hand, a claim that an incentive scheme constituted a breachof fiduciary duty would be established if the scheme provided incentivesof such a nature that the individual deciding claims for benefits wouldbe unable to set aside personal interest and make the benefits determinationbased on the terms of the plan. Cf. Donovan v. Bierwirth, 680 F.2d 263,271 (2d Cir.) (trustees should "avoid placing themselves in a positionwhere their acts as officers or directors of the corporation will preventtheir functioning with the complete loyalty to participants demanded ofthem as trustees"), cert. denied, 459 U.S. 1069 (1982). For example,a compensation scheme that provided direct financial incentives to planfiduciaries for making adverse rulings on benefits claims-e.g., a (highlyunlikely) scheme providing fiduciaries with a fee for each claim they deny-wouldrun afoul of the duty of loyalty.

5. Read literally, the "administrative" allegations in the complaintmerely allege that petitioners "seek to fund their supplemental medicalexpense payments * * * by administering disputed and non-routine healthinsurance claims" and making the determinations necessary to such administration.Pet. App. 86a. That is merely an allegation that petitioners make a profitby administering the ERISA plan, and it certainly does not state a claimof breach of fiduciary duty. Even if it were construed, however, to allegeas well that petitioners employed some form of compensation scheme in whichthose processing claims for the HMO shared in the HMO's general profits,it would not allege a breach of fiduciary duty under ERISA, for the reasonsgiven above.
Nothing in the complaint itself suggests that respondent was intending toplead that petitioners employed the kind of unusual incentive scheme, describedabove, in which those who decide disputed claims would be paid on the basisof how many claims they deny or would otherwise be paid in a way that violatesERISA's standards of fiduciary duty. Indeed, the court of appeals read thecomplaint to allege only that physicians at the HMO who participate in claimsprocessing are provided with a bonus payment based on the HMO's overallprofits. See, e.g., Pet. App. 19a ("Because the physician/administrators'year-end bonuses were based on the difference between total plan costs (i.e.,the costs of providing medical services) and revenues (i.e., payments byplan beneficiaries), an incentive existed for them to limit treatment and,in turn, HMO costs so as to ensure larger bonuses.") (emphasis omitted);id. at 21a (complaint alleges that petitioners "control the care oftheir patients and reap the profits generated by the HMO through the limiteduse of tests and referrals") (emphasis omitted). Because the "administrative"allegations of the complaint therefore do not allege a breach of fiduciaryduty under ERISA, the judgment of the court of appeals should be reversed.
CONCLUSION

The judgment of the court of appeals should be reversed.
Respectfully submitted.

SETH P. WAXMAN
Solicitor General
EDWIN S. KNEEDLER
Deputy Solicitor General
JAMES A. FELDMAN
Assistant to the Solicitor
General



HENRY L. SOLANO
Solicitor of Labor
ALLEN H. FELDMAN
Associate Solicitor
MARK S. FLYNN
Senior Appellate Attorney
Department of Labor




NOVEMBER 1999


1 The district court ruled that Count IV was preempted and could not properlybe amended to state an ERISA claim because respondent sought extra-contractualdamages that were not available under ERISA. Pet. App. 67a-68a, 70a-76a.The court also ruled that Count III "relate[d] to" an employeewelfare benefit plan, 29 U.S.C. 1144(a), and thus was preempted becauseit sought to impose additional disclosure requirements on an ERISA planadministrator under state law in addition to those expressly enumeratedin ERISA's comprehensive disclosure scheme. Pet. App. 76a-80a. As explainedbelow, when respondent subsequently amended Count III to assert a fiduciarybreach claim under ERISA, the amendment did not allege any failure to discloseinformation.

2 Respondent also brought her fiduciary breach claim against Carle HealthInsurance Management Co., Inc. (CHIMCO), a management entity, which likeHAMP is alleged to be a wholly owned subsidiary of Carle Clinic. Pet. App.84a. CHIMCO is not a petitioner in this Court.

3 As we explain below, pp. 9-11, infra, respondent's use of the term "plan"to refer to the HMO differs from the term's meaning under ERISA.

4 Because the HMO is not the ERISA plan, the court of appeals erred in suggesting,Pet. App. 16a, 36a, that petitioners here had control over the assets ofan employee welfare benefit plan. State Farm and its employees paid a premiumto HAMP for subscription in the HMO, J.A. 103; there is therefore apparentlyno underlying trust funding the ERISA plan. The assets referred to in thecomplaint belong either to HAMP or Carle Clinic, not to an ERISA plan. Theallegation that HAMP made supplemental payments to Carle Clinic, which inturn funded payments to physicians, therefore states nothing more than thatHAMP used its own funds as a business entity for that purpose.
It also follows that respondent's allegation (Pet. App. 87a) that "thePlan" has been deprived of the "supplemental medical expense payments,"and her corresponding request that petitioners therefore should make reimbursement(presumably to "the Plan") for those expenses, make no sense inERISA terms. The year-end payments were not plan assets in the first place,and their return to the HMO would not constitute reimbursement to an ERISAplan. Respondent also has sought "such other equitable relief as th[e]court deems just." Id. at 87a. If she were to establish that the incentivearrangement was incompatible with ERISA's fiduciary duty provisions, shecould obtain a prospective injunction against the arrangement insofar asit affected ERISA plan participants. In addition, to the extent she wasadversely affected by the incentive arrangement, she could obtain individualequitable relief, such as the disgorgement of the fiduciary's profits obtainedby the breach committed as to her. Varity Corp. v. Howe, 516 U.S. 489, 507(1996); Mertens v. Hewitt Assocs., 508 U.S. 248, 260 (1993).

5 An HMO also acts as insurer to the extent that it bears risk. See generallyGroup Life & Health Ins. Co. v. Royal Drug Co., 440 U.S. 205, 227 n.34(1979) (noting that "certain aspects" of advance-payment medical-benefitsplans may be the "business of insurance" under the McCarran-FergusonAct, 15 U.S.C. 1012). See also Washington Physicians Serv. Ass'n v. Gregoire,147 F.3d 1039, 1045, 1046 (9th Cir. 1998), cert. denied, 119 S. Ct. 1033(1999); Anderson v. Humana, Inc., 24 F.3d 889, 892 (7th Cir. 1994). Butsee Texas Pharmacy Ass'n v. Prudential Ins. Co., 105 F.3d 1035, 1038-1039(5th Cir.), cert. denied, 522 U.S. 820 (1997).

6 In some cases, a treating physician in an HMO could exercise administrativeduties that are clearly distinct from his treatment responsibilities andthat therefore potentially subject him to ERISA fiduciary standards whenhe is exercising those administrative duties. For example, it is possiblethat a physician who believes that a particular treatment is medically advisablefor a patient has the discretionary administrative responsibility withinan HMO for determining whether a claim for such treatment is covered bythe ERISA plan. Even if a treating physician may in some circumstances occupysuch a dual role, however, that dual role would not be triggered merelybecause the standards that govern the physician's ordinary treatment decisions-medicalnecessity, the existence of an emergency, etc.-are also the standards governingthe HMO's obligation to provide or pay for care for the patient. Otherwise,every treating physician would automatically become an ERISA fiduciary wheneverthe physician makes a medical judgment about the appropriate care for apatient. Respondent in this case did not allege that any particular circumstancesthat would trigger such a dual role existed in this case. Therefore, thequestion whether and to what extent a physician may occupy a dual role astreating physician and administrator of an ERISA plan is not presently beforethe Court.

7 See also Fort Halifax Packing Co. v. Coyne, 482 U.S. 1, 10 (1987) ("Wehave not hesitated to enforce ERISA's pre-emption provision where statelaw created the prospect that an employer's administrative scheme wouldbe subject to conflicting requirements."); Alessi v. Raybestos-Manhattan,Inc., 451 U.S. 504, 524 (1981) (state law that "eliminates one methodfor calculating pension benefits * * * that is permitted by federal law"is preempted).

8 See Pacificare of Okla., Inc. v. Burrage, 59 F.3d 151, 154-155 (10th Cir.1995) (ERISA Section 514(a) does not preempt state-law action seeking toimpose vicarious liability on HMO for malpractice of HMO physician); cf.U.S. Healthcare, Inc., 1999 WL 728474, at *8-*9 (state-law claims againstHMO for direct negligence and vicarious liability are not subject to completepreemption doctrine under ERISA); Rice v. Panchal, 65 F.3d 637, 646 (7thCir. 1995) (vicarious claims not completely preempted); Dukes, 57 F.3d at356 (vicarious and direct claims not completely preempted); Lupo v. HumanAffairs Int'l, Inc., 28 F.3d 269, 272 (2d Cir. 1994) (vicarious claims notcompletely preempted).

9 It is of course possible that a particular action can constitute bothadministration of an ERISA plan and conduct that the State can regulateinsofar as it affects outside parties. Cf. Lordmann Enters., Inc. v. Equicor,Inc., 32 F.3d 1529, 1533 (11th Cir. 1994), cert. denied, 516 U.S. 930 (1995)(no preemption where health care provider-not plan beneficiary-brings claimof negligent misrepresentation against ERISA plan administrator based onfaulty provision of information to health care provider about coverage ofthe plan).

10 Cf., e.g., American Medical Ass'n, Council on Ethical and Judicial Affairs,Code of Medical Ethics § 8.05, at 128 (1998-1999 ed.) (provisions ofmedical ethics code governing "contractual relationships that physiciansassume when they join or affiliate with group practices or agree to provideservices to the patients of an insurance plan"); id. § 8.051,at 129 (rules regarding "conflict of interest under capitation"schemes of "[m]anaged care organizations").

11 Many States have enacted legislation limiting incentive payments thatmay be made to physicians. See, e.g., Alaska Stat. § 21.86.150(i)(4)(Michie 1998); Cal. Health & Safety Code § 1348.6 (West Supp. 1999);Ga. Code Ann. § 33-20A-6 (Supp. 1999); Idaho Code § 41-3928 (1998);Kan. Stat. Ann. § 40-4605 (Supp. 1998); La. Rev. Stat. Ann. §22:215.19 (West Supp. 1999); Md. Code Ann. Ins. § 15-113(c) (1997);Minn. Stat. § 72A.20 Subd. 33 (1999); Mo. Rev. Stat. § 354.606(9)(Supp. 1999); Mont. Code Ann. § 33-36-204(2) (1997); Neb. Rev. Stat.§ 44-7106(2)(h) (Supp. 1998); Nev. Rev. Stat. § 695G.260 (1998);Ohio Rev. Code Ann. § 1751.13(D)(1)(a) (Anderson Supp. 1998); 40 Pa.Cons. Stat. Ann. § 991.2112 (West Supp. 1999); R.I. Gen. Laws §23-17.13-3(B)(8) (1996); Tex. Ins. Code Ann. § 3.70-3C(7)(d) (WestSupp. 1999).

12 The requirements generally provide that a group health plan that offerscoverage for a mastectomy shall also provide full coverage for breast reconstructionsurgery. § 902(a), 112 Stat. 2681-436 (to be codified at 29 U.S.C.1185b(a)).

13 Under provisions of the Social Security Act permitting Medicare recipientsto obtain benefits through enrollment in HMOs, specific restrictions applyto physician incentive payments that may be made by such HMOs. See, e.g.,42 U.S.C. 1395w- 22(j)(4) (Supp. III 1997) (HMO may not make a "specificpayment * * * to a physician or physician group as an inducement to reduceor limit medically necessary services provided with respect to a specificindividual enrolled with the [HMO]"). See also 42 U.S.C. 1396b(m)(2)(A)(x)(Supp. III 1997) (applying same rules to Medicaid); 42 C.F.R. 422.208 (implementingMedicare regulation); 42 C.F.R 434.70(a)(2) (implementing Medicaid regulation).A health care reform bill recently passed by the House of Representatives,see pp. 25-26, infra, would apply virtually the same restrictions to allgroup health plans and health insurers. See H.R. 2990, 106th Cong., 1stSess. § 1133 (1999). See 145 Cong. Rec. H9523-01 (daily ed. Oct. 7,1999).

14 The plan document cited in the text is the subscription agreement betweenState Farm (the employer) and Carle Care (the HMO) that provides for enrollmentof State Farm employees in Carle Care and sets the benefits to be provided.

15 See, e.g., Englehardt v. Paul Revere Life Ins. Co., 139 F.3d 1346, 1352(11th Cir. 1998); Bailey v. Blue Cross & Blue Shield of Virginia, 67F.3d 53, 56 (4th Cir. 1995), cert. denied, 516 U.S. 1159 (1996); Tregoningv. American Community Mutual Ins. Co., 12 F.3d 79, 82 (6th Cir. 1993), cert.denied, 511 U.S. 1082 (1994); Libbey-Owens-Ford Co. v. Blue Cross &Blue Shield Mut. of Ohio, 982 F.2d 1031, 1035 (6th Cir.) (an insurance companywith discretionary authority to determine claims is an ERISA fiduciary "whetherthe * * * company is the carrier administering claims under an insurancepolicy or * * * is administering claims for a fee under a self-insured plan"),cert. denied, 510 U.S. 819 (1993).

16 The courts of appeals have held that state-law claims arising from claimsdenials by HMOs are preempted (unless saved by the insurance savings clause).See, e.g., Parrino v. FHP, Inc., 146 F.3d 699 (9th Cir.) (state-law claimbased on HMO's denial of particular cancer therapy), cert. denied, 119 S.Ct. 510 (1998); Turner v. Fallon Community Health Plan, 127 F.3d 196 (1stCir. 1997) (same), cert. denied, 118 S. Ct. 1512 (1998); Cannon v. GroupHealth Serv., Inc., 77 F.3d 1270 (10th Cir.) (state-law claim of delay byHMO and insurers in authorizing particular cancer treatment), cert. denied,519 U.S. 816 (1996); Kuhl v. Lincoln Nat'l Health Plan, Inc., 999 F.2d.298 (8th Cir. 1993) (state-law claim of delay in HMO's authorization forout-of-network surgery), cert. denied, 510 U.S. 1045 (1994).

17 The Department of Labor has published a new proposed claims procedureregulation. 63 Fed. Reg. 48,390 (1998). That regulation "would establishnew standards for the processing of group health, disability, pension, andother employee benefit plan claims filed by participants and beneficiaries."Ibid. The proposed regulation was designed in large part to address the"dramatic changes" that "have occurred in the health industry"caused by the "growth of managed care delivery systems." Id. at48,391. The proposed regulation therefore specifically addresses claimsprocedures of "group health plan services or benefits," see, e.g.,id. at 48,405, and plans in which benefits are provided by "an insurancecompany, insurance service, third-party contract administrator, health maintenanceorganization, or similar entity," id. at 48,406 (emphasis added).

18 A number of bills addressing HMOs and their relationship to ERISA arecurrently in the forefront of congressional consideration. Quality Carefor the Uninsured Act of 1999, H.R. 2990, 106th Cong., 1st Sess., 145 Cong.Rec. H9523-01 (daily ed. Oct. 7, 1999); Patients' Bill of Rights Plus Act,S. 1344, 106th Cong., 1st Sess., 145 Cong. Rec. S8623 (daily ed. July 15,1999) (bill passed as amended); see H.R. Res. 348, 106th Cong., 1st Sess.,145 Cong. Rec. H11341 (daily ed. Nov. 2, 1999) (House disagrees with Senateamendment to H.R. 2990 and agrees to conference).

19 Firestone Tire & Rubber established that any such arrangement shouldbe "weighed as a factor in determining whether there is an abuse ofdiscretion" in a claim for denial of benefits under ERISA Section 502(a)(1)(B),29 U.S.C. 1132(a)(1)(B). 489 U.S. at 115 (internal quotation marks omitted).The courts of appeals have varied in their approach to factoring in suchsystemic divided loyalties. See Doyle v. Paul Revere Life Ins. Co., 144F.3d 181, 184 (1st Cir. 1998).