American Mfr's. Mut. Ins v Sullivan

Decision Date03 March 1999
Docket Number972000
Citation143 L.Ed.2d 130,119 S.Ct. 977,526 U.S. 40
CourtU.S. Supreme Court

Chief Justice Rehnquist delivered the opinion of the Court.

Pennsylvania provides in its workers' compensation regime that an employer or insurer may withhold payment for disputed medical treatment pending an independent review to determine whether the treatment is reasonable and necessary. We hold that the insurers are not "state actors" under the Fourteenth Amendment, and that the Pennsylvania regime does not deprive disabled employees of property within the meaning of that Amendment.


Before the enactment of workers' compensation laws, employees who suffered a work-related injury or occupational disease could recover compensation from their employers only by resort to traditional tort remedies available at common law. In the early 20th century, States began to replace the common-law system, which often saddled employees with the difficulty and expense of establishing negligence or proving damages, with a compulsory insurance system requiring employers to compensate employees for work-related injuries without regard to fault. See generally 1 A. Larson & L. Larson, Larson's Workers' Compensation Law 5.20-5.30, pp. 2-15 to 2-25 (1996).

Following this model, Pennsylvania's Workers' Compensation Act, Pa. Stat. Ann., Tit. 77, 1 et seq. (Purdon 1992 and Supp. 1998) (Act or 77 Pa. Stat. Ann.), first enacted in 1915, creates a system of no-fault liability for work-related injuries and makes employers' liability under this system "exclusive . . . of any and all other liability." 481. All employers subject to the Act must either (1) obtain workers' compensation insurance from a private insurer, (2) obtain such insurance through the State Workers' Insurance Fund (SWIF), or (3) seek permission from the State to self-insure. 501(a). Once an employer becomes liable for an employee's work-related injury-because liability either is not contested or is no longer at issue-the employer or its insurer1 must pay for all "reasonable" and "necessary" medical treatment, and must do so within 30 days of receiving a bill. 531(1)(i), (5).

To assure that insurers pay only for medical care that meets these criteria, and in an attempt to control costs, Pennsylvania amended its workers' compensation system in 1993. 1993 Pa. Laws, No. 44, p. 190. Most important for our purposes, the 1993 amendments created a "utilization review" procedure under which the reasonableness and necessity of an employee's past, ongoing, or prospective medical treatment could be reviewed before a medical bill must be paid. 77 Pa. Stat. Ann. 531(6). (Purdon Supp. 1998).2 Under this system, if an insurer "disputes the reasonableness or necessity of the treatment provided," 531(5), it may request utilization review (within the same 30-day period) by filing a one-page form with the Workers' Compensation Bureau of the Pennsylvania Department of Labor and Industry (Bureau). 531(6)(i); 34 Pa. Code 127.404(b), 127.452(a) (1998). The form identifies (among other things) the employee, the medical provider, the date of the employee's injury, and the medical treatment to be reviewed. Ibid.; App. 5. The Bureau makes no attempt, as the Court of Appeals stated, to "address the legitimacy or lack thereof of the request," but merely determines whether the form is "properly completed-i.e., that all information required by the form is provided." Sullivan v. Barnett 139 F.3d 158, 163 (CA3 1998); see 34 Pa. Code 127.452(a). Upon the proper filing of a request, an insurer may withhold payment to health care providers for the particular services being challenged. 77 Pa. Stat. Ann. 531(5) (Purdon Supp. 1998); 34 Pa. Code 208(f).

The Bureau then notifies the parties that utilization review has been requested and forwards the request to a randomly selected "utilization review organization" (URO). 127.453. URO's are private organizations consisting of health care providers who are "licensed in the same profession and hav[e] the same or similar specialty as that of the provider of the treatment under review," 77 Pa. Stat. Ann. 531(6)(i) (Purdon Supp. 1998); 34 Pa. Code 127.466. The purpose of utilization review, and the sole authority conferred upon a URO, is to determine "whether the treatment under review is reasonable or necessary for the medical condition of the employee" in light of "generally accepted treatment protocols." 127.470(a), 127.467. Reviewers must examine the treating provider's medical records, 127.459, 127.460, and must give the provider an opportunity to discuss the treatment under review, 127.469.3 Any doubt as to the reasonableness and necessity of a given procedure must be resolved in favor of the employee. 127.471(b).

URO's are instructed to complete their review and render a determination within 30 days of a completed request. 77 Pa. Stat. Ann. 531(6)(ii) (Purdon Supp. 1998); 34 Pa. Code 127.465. If the URO finds in favor of the insurer, the employee may appeal the determination to a workers' compensation judge for a de novo review, but the insurer need not pay for the disputed services unless the URO's determination is overturned by the judge, or later by the courts. 77 Pa. Stat. Ann. 531(6)(iv) (Purdon Supp. 1998); 34 Pa. Code 127.556. If the URO finds in favor of the employee, the insurer must pay the disputed bill immediately, with 10 percent annual interest, as well as the cost of the utilization review.4 34 Pa. Code 127.208(e); 77 Pa. Stat. Ann. 531(6)(iii) (Purdon Supp. 1998).

Respondents are 10 individual employees and 2 organizations representing employees who received medical benefits under the Act.5 They claimed to have had payment of particular benefits withheld pursuant to the utilization review procedure set forth in the Act. They sued under Rev. Stat. 1979, 42 U.S.C. 1983 acting individually and on behalf of a class of similarly situated employees.6 Named as defendants were various Pennsylvania officials who administer the Act, the director of the SWIF, the School District of Philadelphia (which self-insures), and a number of private insurance companies who provide workers' compensation coverage in Pennsylvania. Respondents alleged that in withholding workers' compensation benefits without predeprivation notice and an opportunity to be heard, the state and private defendants, acting "under color of state law," deprived them of property in violation of due process. Amended Complaint 265-271, App. 43-44. They sought declaratory and injunctive relief, as well as damages.

The District Court dismissed the private insurers from the lawsuit on the ground that they are not "state actors," Sullivan v. Barnett, 913 F. Supp. 895, 905 (ED Pa. 1996), and later dismissed the state officials who remained as defendants, as well as the school district, on the ground that the Act does not violate due process, App. to Pet. for Cert. 71a.

The Court of Appeals for the Third Circuit disagreed on both issues. 139 F.3d 158 (1998). It held that a private insurer's decision to suspend payment under the Act-what the court called a "supersedeas"-constitutes state action. The court reasoned:

"In creating and executing this system of entitlements, the [State] has enacted a complex and interwoven regulatory web enlisting the Bureau, the employers, and the insurance companies. The [State] extensively regulates and controls the Workers' Compensation system. Although the insurance companies are private entities, when they act under the construct of the Workers' Compensation system, they are providing public benefits which honor [s]tate entitlements. In effect, they become an arm of the State, fulfilling a uniquely governmental obligation under an entirely state-created, self-contained public benefit system. . . .

"The right to invoke the supersedeas, or to stop payments, is a power that traditionally was held in the hands of the State. When insurance companies invoke the supersedeas (i.e., suspension) of an employee's medical benefits, they compromise an employee's [s]tate-created entitlements. The insurers have no power to deprive or terminate such benefits without the permission and participation of the [State]. More importantly, however, the [State] is intimately involved in any decision by an insurer to terminate an employee's constitutionally protected benefits because an insurer cannot suspend medical payments without first obtaining authorization from the Bureau. However this authorization may be characterized, any deprivation that occurs is predicated upon the State's involvement." Id., at 168.

On the due process issue, the Court of Appeals did not address whether respondents have a protected property interest in workers' compensation medical benefits, stating that "[n]either party disputes" this point. Id., at 171, n. 23. Thus focusing on what process is "due," the court held that payment of bills may not be withheld until employees have had an opportunity to submit their view in writing as to the reasonableness and necessity of the disputed treatment to the URO. The court then determined that the relevant statutory language permitting the suspension of payment during utilization review was severable and struck it from the statute. Id. at 173-174.

We granted certiorari, 525 U.S. ___ (1998), to resolve a conflict on the status of private insurers providing workers' compensation coverage under state laws,7 and to review the Court of Appeals' holding that due process prohibits insurers from withholding payment for disputed medical treatment pending review.


To state a claim for relief in an action brought under 1983, respondents must establish that they were deprived of...

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