Pegram v. Herdrich: The Supreme Court Confronts Managed Care

ERISA, adopted a quarter century ago to reform private pension law, imposed by the end of the twentieth century a seemingly insurmountable barrier to managed care reform. The Supreme Court's decision in Pegram v. Herdrich blocked one path out of the ERISA morass-broader use of breach of ERISA fiduciary obligations suits in federal court. On the other hand, it opened another path to holding HMOs accountable in malpractice cases in state court-and suggested that ERISA might impose fiduciary obligations to disclose incentives on HMOs. It is therefore an important decision.

ERISA was intended to give the federal government primary authority for regulating employee pension and benefits plans. As the vast majority of Americans with private health insurance (88%) obtain it through their place of employment, ERISA effectively gives the federal government primary responsibility for regulating private health insurance. Section 514(a) of ERISA provides that ERISA "supersedes" all state laws that "relate to" employee benefits plans. Early Supreme Court decisions read this clause very broadly as preempting state laws that had any "connection with or reference to" a benefits plan.

In particular, Pilot Life v. Dedeaux read ERISA as preempting state tort law challenges to egregious coverage denials. While § 514 contains a "savings clause" excluding the traditional state function of insurance regulation from preemption, the Supreme Court initially read this provision very narrowly to cover only regulation of traditional insurance functions. Moreover, § 514(b) (2) (B) prohibits the states from "deeming" ERISA plans themselves to be insurers, which the Court has read as precluding state regulation of self-funded plans. The net effect of the Court's early interpretations of these provisions was to severely restrict the ability of the states to regulate employee benefits plans.