Stuart Circle Hosp. Corp. v. Aetna Health Mgt.

• Decision Date: 22 July 1992
• Docket Number: File No. 91-736.
• Citation: 800 F. Supp. 328
• Parties: STUART CIRCLE HOSPITAL CORP., Plaintiff, v. AETNA HEALTH MANAGEMENT, et al., Defendants.
• Court: U.S. District Court — Eastern District of Virginia

800 F. Supp. 328

STUART CIRCLE HOSPITAL CORP., Plaintiff, v. AETNA HEALTH MANAGEMENT, et al., Defendants.

File No. 91-736.

United States District Court, E.D. Virginia, Richmond Division.

July 22, 1992.

J. Scott Sexton and William Raymond Rakes, Gentry, Locke, Rakes & Moore, Roanoke, Va., for plaintiff.

Laura Graham Fox and John Bowers McCammon, Wright, Robinson, McCammom, Osthmer & Tatum, Richmond, Va., for defendants.

MEMORANDUM OPINION

RICHARD L. WILLIAMS, District Judge.

This matter is before the Court on the Defendant's Motion for Summary Judgment pursuant to Fed.R.Civ.P. 56. For the reasons stated below, the Defendant's motion is granted and the case is hereby dismissed with prejudice.

BACKGROUND

Stuart Circle Hospital Corporation ("Stuart Circle") seeks a judgment against the Defendants Aetna Life Insurance Co. and Aetna Health Management (collectively "Aetna") declaring that Aetna's actions in implementing and operating a preferred provider organization (the "Aetna PPO") are in violation of Va.Code § 38.2-3407 (the "PPO Statute") and enjoining further violations or operations until the Aetna PPO is established in compliance with the PPO Statute.

Defendant Aetna variously administers and insures employee benefit plans in Virginia. Among the various products that Aetna offers its employee benefit plan customers in the Richmond area is a Preferred Provider Program, the main feature of which is the Aetna PPO. Aetna offers the Preferred Provider Program only to employee benefit plans.

The Aetna PPO in the Richmond area was originally established by Aetna in 1987, and is now managed by Aetna Health Management ("AHM"). AHM maintains the Aetna PPO through contracts with selected health care providers who agree (1) to provide services at discounts from their normal fees to individuals covered under employee benefit plans administered or insured by Aetna; and (2) to comply with the utilization review requirements of the employee benefit plans. In return, these providers expect an increase in patient volume because the employee benefit plans are designed to provide financial incentives for plan participants to select the preferred provider. AHM currently has preferred provider contracts with six Richmond area hospitals: Retreat, Richmond Memorial, St. Mary's, Henrico Doctors', Chippenham, and Johnston-Willis.

Currently, over 120 Richmond area employee benefit plans utilize Aetna's Preferred Provider Program. Some of these plans are self-insured, in which case Aetna acts as administrator of the employee benefit plan. In other cases, Aetna acts as both insurer and administrator of the employee benefit plan. However, the offers and negotiations between Aetna and the hospitals selected for the PPO did not involve any employee benefit plan, employer, or sponsor of an employee benefit plan. Rather, Aetna and the hospitals were the sole contracting parties in the process.

Stuart Circle claims that is was unreasonably excluded from the Aetna PPO, not because it could not meet Aetna's "terms and conditions," but because it was not a member of Aetna's HMO in Richmond. Stuart Circle demands that Aetna comply with the requirements of Virginia law governing the establishment of a PPO by an insurer.

Prior to determining the merits of the case, the Court required the parties to brief the issue of whether Plaintiff's claim may be preempted by the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. § 1001 et seq. See HCA Health Services v. Metropolitan Life Ins. Co., 957 F.2d 120, 125 n. 1 (4th Cir.1992) ("The District Court erred in interpreting the Virginia statute before deciding if it was preempted by ERISA.").

ISSUE

This dispute involves the application and interpretation of Va.Code Ann. § 38.2-3407(B). The question presented is whether this provision is preempted by ERISA. To resolve this question, the Court must determine (1) whether § 38.2-3407(B) "relates to" employee benefit plans and thus comes under the purview of ERISA and (2) whether Virginia's PPO statute regulates the "business of insurance" as this term has been defined under the McCarran-Ferguson Act and thus comes within ERISA's "savings clause."

DISCUSSION OF AUTHORITY

The Plaintiff argues that Va.Code § 38.2-3407(B) does not "relate to" an employee benefit plan, and even if it did, it regulates insurance and, therefore, is saved from preemption by ERISA. The Defendant argues the very opposite — that the Virginia statute is preempted by ERISA but does not regulate the "business of insurance."

I. THE PPO STATUTE

The PPO Statute, Section 38.2-3407, provides as follows:

A. One or more insurers may offer or administer a health benefit program under which the insurer or insurers may offer preferred provider policies or contracts that limit the numbers and types of providers of health care services eligible for payment as preferred providers. B. Any insurer shall establish terms and conditions that shall be met by a hospital, physician or type of provider listed in § 38.2-3408 in order to qualify for payment as a preferred provider under the policies or contracts. These terms and conditions shall not discriminate unreasonably against or among such health care providers. No hospital, physician or type of provider listed in § 38.2-3408 willing to meet the terms and conditions offered to it or him shall be excluded. Neither differences in prices among hospitals or other institutional providers produced by a process of individual negotiations with providers based on market conditions or price differences among providers in different geographical areas, shall be deemed unreasonable discrimination. The Commission shall have no jurisdiction to adjudicate controversies growing out of this subsection.

II. PREEMPTION UNDER ERISA

An employee welfare plan is defined under ERISA as a plan which provides to employees "medical, surgical, or hospital care or benefits, or benefits in the event of sickness, accident, disability or death," whether these benefits are provided "through the purchase of insurance or otherwise." 29 U.S.C. § 1002(1). Plans may self-insure or they may purchase insurance for their participants. Plans that purchase insurance — so-called "insured plans" — are directly affected by state laws that regulate the insurance industry.

ERISA imposes a variety of substantive requirements relating to participation, funding, and vesting upon welfare plans, but does not regulate the substantive content of such plans. Thus, ERISA contains almost no federal regulation of the terms of benefit plans. It does, however, contain a broad preemption provision:

Except as provided in subsection (b) of this section (the savings clause), the provisions of this subchapter and subchapter III of this chapter shall supersede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan.

ERISA § 514(a), 29 U.S.C. § 1144(a). Thus, any state law that "relates to" an "employee benefit plan" is preempted,¹ unless it fits within one of the enumerated categories of permissible state regulation.

The United States Supreme Court has interpreted ERISA § 514(a) quite broadly. See Metropolitan Life Ins. Co. v. Massachusetts, 471 U.S. 724, 105 S.Ct. 2380, 85 L.Ed.2d 728 (1985). It has repeatedly recognized that the words "relate to ... express a broad preemptive purpose." Morales v. Trans World Airlines, ___ U.S. ___, ___, 112 S.Ct. 2031, 2037, 119 L.Ed.2d 157 (1992).

A state law "relates to" an employee benefit plan "if it has a connection with or reference to such a plan." Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 97, 103 S.Ct. 2890, 2900, 77 L.Ed.2d 490 (1983) (holding that the New York Human Rights Law prohibiting employers from structuring employee benefit plans in a manner which discriminates on the basis of pregnancy relates to employee benefit plans and is, therefore, preempted by ERISA). Preemption is, moreover, not limited to "state laws specifically designed to affect employee benefit plans," nor is it limited to state laws that relate to subject matters addressed by ERISA. Id. at 98-99, 103 S.Ct. at 2900-2901.² Even laws that have only indirect effects on private employee benefit plans are preempted if they "relate" to such a plan. Alessi v. Raybestos-Manhattan, Inc., 451 U.S. 504, 525, 101 S.Ct. 1895, 1907, 68 L.Ed.2d 402 (1981).

Examination of Virginia Code § 38.2-3407 in light of these governing principles compels the conclusion that it is a law that "relates to" employee benefit plans. By contrast, in arguing that the PPO Statute does not relate to employee benefit plans, the Plaintiff stresses that the provision "does not directly regulate the content of an employee benefit plan," and that "the existence of an employee benefit plan is not central to or determinative with respect to the application" of the PPO Statute. (Pl. Mem. at 10.) Plaintiff then tries to minimize the statute's effect on employee benefit plans by describing the effect as "incidental" or "derivative." (Pl.Mem. at 5, 10, 11, 15, and 17) These points are not well taken.

Plaintiff's narrow reading of section 514(a) of ERISA ignores controlling precedent and is at odds with the purpose behind ERISA preemption. The Supreme Court specifically rejected an interpretation of "relates to" that would have limited section 514(a) to "state laws specifically designed to affect employee benefit plans," Shaw, 463 U.S. at 98, 103 S.Ct. at 2900, and has held that even indirect state action bearing on pensions may encroach upon the area of exclusive federal concern. Alessi, 451 U.S. at 525, 101 S.Ct. at 1907. So long as a state law has a "connection with or reference to" an employee benefit plan, then the law relates to the plan, and it is of no consequence whether the effect on the plan is direct or indirect.³

Virginia's PPO Statute does have a clear connection to and effect on employee benefit plans. First, on its face, the statute states that an...