Most states have statutes or common law that allow an insurance policyholder to bring a civil action and seek more than just compensatory damages (e.g., punitive damages) when her insurance company denies coverage in bad faith. The general intent behind these laws is that insurance policies are contracts, but not like most contracts where both parties negotiate the terms. Insurance policies are contracts of adhesion (you get what you get) and because of the unequal bargaining positions, the law imposes greater liability on insurance companies for breaching an insurance contract. Those same protections and remedies are not available to virtually all Americans whose health insurance companies wrongfully deny coverage for medically necessary treatment. The reason being federal law preemption, which has been a hotly litigated issue with employer-provided health insurance plans and now poses a troubling issue as more seniors opt for Medicare Advantage plans. In 2011, approximately one-fourth of Medicare beneficiaries received their benefits through Medicare Advantage plans. Today, it’s more than half.
Unless you are employed by a church or state or local government, your employer-provided health insurance is regulated by federal law. In the private sector, employer-provided health insurance is regulated by the Employee Retirement Income Security Act of 1974 (“ERISA”), while federal employees’ health insurance is regulated by the Federal Employees Health Benefits Act (“FEHBA”). Both statutes have provisions that preempt or prevent civil actions brought under state laws to enforce a right under the insurance policy, to recover amounts owed under the policy, or to obtain a declaratory judgment on an interpretation of a plan/determination of coverage. The Medicare and Medicaid Act (also known as the Social Security Amendments of 1965) has a similar preemption provision. Health insurance purchased through the Health Insurance Marketplace®, a shopping and enrollment service for medical insurance created by the Affordable Care Act, is another story (and perhaps the subject of a future article).
Medicare is the single largest payer of health benefits in America, and Congress is constantly under pressure to control costs. Congress introduced privatization to the Medicare program as an attempt to control costs through the Balanced Budget Act of 1997, which established a new Part C of the Medicare program, known then as the Medicare+Choice program and later renamed the Medicare Advantage Program under the Medicare Prescription Drug, Improvement, and Modernization Act of 2003. Medicare beneficiaries have the option under the law to contract with commercial health insurance companies to obtain their Medicare benefits instead of obtaining their benefits directly from the federal government. The insurance companies contract with the federal government to provide benefits for members who enroll in their Medicare Advantage plans in exchange for payment of a per-member-per-month (“PMPM”) fee that is calculated based on historical claims data. The insurance companies bear the risk that a member’s benefits will exceed the PMPM fee, but they also profit if the member receives less care.
While the stated intent of the Medicare Advantage Program may have been to reduce costs, an unintended consequence was the creation of a structural conflict of interest where commercial insurance companies administering Medicare Advantage plans have a financial incentive to deny or limit access to care and reduce the amount of benefits paid for care. This raises a critical question of whether these insurance companies should enjoy the same protections as the federal government and benefit from preemption of state law claims and remedies intended to hold them accountable for unreasonable, arbitrary, or capricious coverage interpretations and claims adjudications, particularly when those determinations are financially motivated.
Healthcare activist and co-director of Be a Hero, Ady Barkan, recently wrote a chilling op-ed for The Nation, “How Medicare Advantage Could Kill Medicare,” warning of the grave consequences of entrusting the care of Medicare beneficiaries to commercial insurance companies who are paid “$400 billion every year, . . . half the size of our military budget.” The article also states that insurance companies “are being overpaid by taxpayers by at least $23 billion every year” through fraud, waste, and abuse, while maintaining inadequate networks of available providers, wrongfully denying prior authorization requests for care or reimbursement for services as documented in a report by the HHS Office of Inspector General, and even employing artificial intelligence algorithms to conduct utilization reviews and deny care as recently reported in Stat News.
The Medicare Act generally preempts any state law claims that essentially seek to recover wrongfully denied Medicare benefits, and the beneficiary must pursue her remedy through Medicare’s administrative dispute resolution process. Medicare Advantage disputes over coverage and benefits are subject to the same administrative grievance procedures and limited judicial review as the federal Medicare program. See, 42 U.S.C.A. § 1395w-22(g)(5). The Medicare Act’s grievance provision (42 U.S.C.A. § 405(g)) requires Medicare Advantage members and their healthcare providers to submit disputes over coverage and benefits to a Department of Health and Human Services (“HHS”) administrative law judge whose decision can be appealed to the Medicare Appeals Council. The member or her healthcare provider can file a civil lawsuit only after exhausting these administrative appeals, but not against the insurance company, only against HHS for judicial review of the administrative ruling.
The Medicare Act would preempt a state law claim for breach of contract where the Medicare Advantage plan member is suing to recover the amount paid out of pocket for a surgery that the insurance company refused to cover. But what about the member whose pre-service request for authorization is denied and who cannot afford to pay out of pocket for the treatment in order to pursue a claim for reimbursement and exhaust the administrative remedies? That was a concern expressed by Justice John Paul Stevens in his concurring and dissenting opinion in Heckler v. Ringer, 466 U.S. 602 (1984), a case brought by an individual, Freeman Ringer, who could not afford to pay for his bilateral carotid body resection surgery that the HHS Secretary determined was not medically necessary.
Today, the majority holds that Ringer must have the operation that he cannot afford and cannot obtain because of the Secretary’s ruling before he can challenge that ruling. . . . [T]he Court also holds that there is no jurisdiction . . . because Ringer has not submitted a claim for reimbursement. Of course, the reason he has not filed such a claim is that there is nothing to reimburse—he has incurred no expenses because he cannot afford to do so. Without anything to reimburse, the Secretary refuses to provide a hearing on what she and the Court believe to be a nonexistent “claim.”
Heckler at 629–30.
The majority opinion by Chief Justice William Rhenquist held that a claim seeking “the payment of benefits” or “a right to future payments” is preempted by the Medicare Act (Heckler at 620–21), and rejected Justice Stevens’ dissent that would have allowed Ringer to pursue a declaratory judgment in federal court to challenge the Secretary’s determination, holding that “Congress clearly foreclosed the possibility of obtaining such advisory opinions from the Secretary herself, requiring instead that a claim could be filed for her scrutiny only after the medical service for which payment is sought has been furnished . . . [and] we refuse to undercut that choice by allowing federal judges to issue such advisory opinions.” (Heckler at 621–22, internal citations omitted).
Such a sweeping application of preemption to Medicare Advantage plans could foreclose any remedy by beneficiaries who find themselves in a similar position as Mr. Ringer — unable to afford the treatment for which prior authorization is being denied in order to pursue a claim for reimbursement. Even if the insurance company was financially motivated to deny coverage and placed its own profit interests ahead of the health and safety interests of its member, state law claims such as breach of contract, insurance bad faith, negligent infliction of emotional distress, and intentional infliction of emotional distress would be preempted. Even if the insurance company’s wrongful denial of prior authorization and delay in reviewing the appeal results in the member’s death, these same state law claims would be preempted. That is precisely what the United States Court of Appeals for the Ninth Circuit held in Aylward v. SelectHealth, Inc., 35 F.4th 673 (9th Cir. 2022).
Naomi Aylward, the wife of a Medicare Advantage plan member who died waiting for a lung transplant, filed a state court action against the health insurance company that administered the plan. Although her complaint asserted nine causes of action, the court concluded that all the claims alleged the breach of two duties owed to the decedent: (1) a duty to process his appeal in a timely manner; and (2) a duty to properly investigate his prior authorization request, and held that under either theory of liability, Mrs. Aylward’s claims were preempted. Aylward at 681–82.
Whether there are other state law claims that may be brought against Medicare Advantage plans for injuries and damages for which the Medicare grievance process does not provide a remedy and therefore does not preempt remains to be seen as Medicare Advantage plans proliferate. Without congressional action to amend the preemption provision for Medicare Advantage plans, members and their healthcare providers will need counsel and advice from an experienced healthcare attorney to navigate the statutes and common law in the applicable states to avoid the preemptive effect of the Medicare Act and achieve an appropriate and just remedy for the wrongful denial of coverage or limitation on reimbursements. For more information about this article, please contact AGG Healthcare Litigation attorneys Rich Collins, Damon Eisenbrey, or Landen Benson.