ERISA Preemption Rejected in Insurers’ Claims against Health Care ProvidersJuly 6, 2012 | |
Insurance carriers that provide health care coverage in New York (and in other states) typically have developed comprehensive anti-fraud plans that help them identify and investigate insurance fraud. An important tool in these anti-fraud plans is post-payment reviews of claims submitted by health care providers. When insurance carriers detect fraud, and when they are unable to otherwise recoup the amounts they previously paid out, they frequently go to court. In response, a defense that health care providers commonly raise in these cases is that the insurers’ fraud claims are preempted by the Employment Retirement Income Security Act (“ERISA”). A growing number of court decisions, including a 1996 ruling by the U.S. Court of Appeals for the Second Circuit, make it quite clear, however, that fraud claims to recover benefits that are brought against health care providers in these kinds of circumstances are not barred by ERISA.
In the ERISA context, there are two types of preemption: “complete” preemption under ERISA Section 502(a), and “express” preemption under ERISA Section 514. Generally speaking, state laws are completely preempted by Section 502(a) when (i) the plaintiff could have originally brought the claim under Section 502, and (ii) no other legal duty supported the claim. The express preemption provision of ERISA Section 514(a) provides that ERISA generally “shall supersede any and all State laws insofar as they may now or hereafter relate to an employee benefit plan.” The objective of the express preemption provision is “to avoid a multiplicity of regulation in order to permit the nationally uniform administration of employee benefit plans.”
A New Jersey federal district court, in Association of New Jersey Chiropractors v. Aetna, Inc., recently issued a decision applying these standards to contentions by a number of health care providers that fraud counterclaims brought against them by a health care insurer were preempted by ERISA. The court’s decision reflects the analysis that courts typically rely on in these cases to reject preemption arguments.
The case arose after Aetna’s Special Investigations Unit (“SIU”) investigated a number of medical professionals who had provided health care services to patients insured by Aetna. Following the investigations, Aetna concluded that the providers had misrepresented their services and had over-billed Aetna; it requested that the providers repay it for the overpayments. In response, the providers filed a lawsuit against Aetna alleging violations of the Racketeer Influenced and Corrupt Organizations Act and ERISA. Aetna then asserted counterclaims against the providers including claims for common law fraud, negligent misrepresentation, and unjust enrichment against two New York chiropractors and for violation of the New Jersey Insurance Fraud Prevention Act (“NJIFPA”), negligent misrepresentation, and unjust enrichment against a New Jersey chiropractor.
The plaintiffs moved to dismiss Aetna’s counterclaims. They argued that the counterclaims were preempted by ERISA under the two-prong test for complete preemption. The first prong provides that a civil action may be brought under Section 502(a)(3) only by a participant, beneficiary, or fiduciary seeking “(A) to enjoin any act or practice which violates any provision of this subchapter or the terms of the plan, or (B) to obtain other appropriate equitable relief (i) to redress such violations or (ii) to enforce any provisions of this subchapter or the terms of the plan.”
Acknowledging that Aetna was neither a participant nor a beneficiary, the plaintiffs argued that Aetna was acting as a plan fiduciary because, in seeking repayment, it was making benefit determinations. The court disagreed, finding that Aetna’s counterclaims against the plaintiffs were based on allegations that they had submitted fraudulent or negligent bills to Aetna. The court reasoned that the relevant inquiry was whether Aetna was acting as a fiduciary in proceeding with its claims or whether it asserted its claims on behalf of plan beneficiaries.
As the victim of the plaintiffs’ alleged fraud, the court stated, Aetna brought its counterclaims on its own behalf and was not acting in the capacity of a fiduciary. Accordingly, the court held that Aetna had not brought those counterclaims in its capacity as a fiduciary, and it determined that the plaintiffs had not met the first prong of the complete preemption test.
The court added that even if Aetna had been acting as a fiduciary, its counterclaims were not preempted because they arose from “independent legal duties” that existed outside of any ERISA plan; therefore, the plaintiffs did not meet the second prong of the two-prong test under which they had to demonstrate that the counterclaims were “derived entirely from the particular rights and obligations established” by the plans.
As the court observed, Aetna’s counterclaims were based on an independent duty that prohibited providers from committing fraud, including submitting fraudulent bills to an insurer for payment.
Interestingly, the court also rejected the plaintiffs’ attempts to frame Aetna’s counterclaims as essentially a coverage dispute with the “critical issue” being what they were “entitled to under Aetna’s plans,” stating that this “simply [was] not the case.” The court acknowledged that the plans might be governed by ERISA, but it explained that Aetna’s counterclaims were not “derived entirely from the particular rights and obligations established by the plans,” as the plaintiffs had to show to establish preemption. As such, the court concluded, Aetna’s counterclaims were not completely preempted by ERISA.
The court reached the same conclusion with respect to the plaintiffs’ contentions that Aetna’s counterclaims were expressly preempted by ERISA § 514 on the ground that they related to an employee benefit plan. The plaintiffs alleged that Aetna’s fraud claims were “related to” ERISA plans because their disposition would require an analysis of the terms and conditions of each plan to determine whether or not the coverage distinction Aetna referenced actually existed, but the court did not accept that contention.
The court noted that similar arguments had been rejected in other cases, including Horizon Blue Cross Blue Shield of New Jersey v. Transitions Recovery. In the Transitions Recovery case, the New Jersey district court explained, the insurance company sought to recover under the NJIFPA as well as for common law fraud and negligent misrepresentation. The Transitions Recovery court concluded that neither the NJIFPA claims nor the common law claims asserted in that case were preempted under ERISA Section514. First examining the NJIFPA claim, the court said that the NJIFPA was not specifically designed to address ERISA benefit plans but was designed “to confront aggressively the problem of insurance fraud in New Jersey.” The court added that the law accomplished that goal by regulating all types of insurance contracts and creating penalties for fraudulent conduct related to insurance claims.
Furthermore, the Transitions Recovery court continued, the NJIFPA did not single out employee benefit plans for special treatment; rather, its proscriptions applied equally to all types of insurance policies, including employee benefit plans. Finally, the court found that the NJIFPA did not create rights and restrictions that were predicated on the existence of an ERISA plan but regulated the conduct of insureds seeking insurance benefits and allowed an insurance company to bring a cause of action against an insured who attempted to procure insurance benefits by fraudulent means. As such, the Transitions Recovery court concluded, ERISA did not preempt the insurance company’s NJIFPA claim “because the NJIFPA creates rights and obligations separate and distinct from ERISA, and the NJIFPA does not dictate or restrict the choices available under ERISA plans with regard to benefits or administration.”
The Transitions Recovery court likewise found that the insurer’s common law fraud and negligent misrepresentation claims were not preempted. First, the court found that when an ERISA plan was merely “the context” in which a traditional state tort had occurred (as the Second Circuit had pointed out in Geller v. County Line Auto Sales, Inc.) Section 514(a) did not preempt a state law cause of action. Second, the court found that preempting these claims conflicted with the purposes of ERISA, which were to protect the interests of plans and their beneficiaries and providing appropriate remedies and ready access to the federal courts.
The Aetna court found the reasoning of Transitions Recovery persuasive and applicable in its case. It therefore held that the plaintiffs had not shown that any of Aetna’s state law claims were preempted under Section 514, and it refused to dismiss Aetna’s preemption claims.
Fraudulent billing practices such as “upcoding” and “unbundling” affect health insurance companies as well as insureds and plan beneficiaries by raising costs and premiums. The Aetna ruling, together with other cases that permit insurance companies to assert claims for fraud against health care providers notwithstanding ERISA, essentially recognize that preventing an insurer from recovering from a provider for that provider’s fraudulent or negligent misrepresentations would be at odds with the very purpose of ERISA. Simply put, as the Transitions Recovery court recognized, “the legislative purpose of ERISA supports a finding that ERISA does not preempt [an insurer’s] state law claims” in these circumstances.
 29 U.S.C. § 1001, et seq.
 In Geller v. County Line Auto Sales, Inc., 86 F.3d 18 (2d Cir. 1996), benefit plan trustees brought suit against an employer seeking to recover health benefits they claimed had been improperly paid. The plaintiffs alleged that the defendants had falsely represented that the girlfriend of one of the defendants was a full time employee of the employer and therefore was eligible for benefits. After the woman died, and after the plan had paid over $104,000 in medical benefits to the decedent, the plaintiffs allegedly discovered that the decedent had not been an employee and had not been eligible to receive benefits. The plaintiffs demanded reimbursement from the defendants, who refused. Litigation followed, and the Second Circuit rejected arguments that the plaintiffs’ common law fraud claims were preempted by ERISA, explaining that “the preemption provision should not be read to contravene the statute’s underlying design,” which was “to protect the interests of participants and beneficiaries of employee benefit plans.” The circuit court noted that the common law fraud claim sought to advance the rights and expectations created by ERISA, and held that it was not preempted “simply because it may have a tangential impact on employee benefit plans.” In particular, the Second Circuit found that “[t]he plan was only the context in which the garden variety fraud occurred.”
 See 29 U.S.C. § 1132(a).
 See 29 U.S.C. 1441.
 See, e.g., Pascack Valley Hosp., Inc. v. Local 464A UFCW Welfare Reimbursement Plan, 388 F.3d 393 (3d Cir. 2004).
 29 U.S.C. § 1144(a).
 New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Ins. Co., 514 U.S. 645 (1995).
 2012 U.S. Dist. Lexis 64413 (D.N.J. May 8, 2012).
 N.J.S.A. § 17:33A-1 to -30.
 29 U.S.C. § 1132(a)(3).
 Under ERISA:
a person is a fiduciary with respect to a plan to the extent (i) he exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets, (ii) he renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so, or (iii) he has any discretionary authority or discretionary responsibility in the administration of such plan.
29 U.S.C. 1002(21)(A).
 2011 U.S. Dist. Lexis 62184 (D.N.J. June 10, 2011).
 Supra, n. 2.
 Standard billing forms use numeric codes to describe the medical services for which a health care provider seeks payment. The American Medical Association’s Current Procedural Terminology (“CPT”) codes are ranged so as to describe services of increasing complexity or that consume an increasing amount of the provider’s time, such that the higher number code reflects a procedure for which the provider would be compensated at a higher rate than the lower-numbered code. Billing for a higher CPT procedure than the service actually performed is a fraudulent practice known as “upcoding.” Also, many CPT codes describe services that are part of or included in services described by other, more inclusive CPT codes. Billing for services by using separate codes for each of the included services, when the services are more accurately described under a single “inclusive” code, to increase reimbursement is a fraudulent practice known as “unbundling.”
 See, e.g., Trustees of the AFTRA Health Fund v. Biondi, 303 F.3d 765 (7th Cir. 2002) (“plan participant’s decision to commit fraud in the context of an employee benefit plan does not immunize him from tort liability under state law”); Aetna Health Inc. v. Health Goals Chiropractic Center, Inc., 2011 U.S. Dist. Lexis 38059 (D.N.J. April 7, 2011) (fraud claims brought by insurer against health care provider did not implicate ERISA). Cf. Merling v. Horizon Blue Cross and Blue Shield of New Jersey, 2009 U.S. Dist. Lexis 67120 (D.N.J. July 31, 2009) (insurer’s common law fraud and misrepresentation claims preempted by ERISA).
Reprinted with permission from the July 6, 2012 issue of the New York Law Journal. All rights reserved.