A third-party administrator faces California health privacy and unfair business practices charges for allegedly handing over a plan participant’s case management information to an employer, which then terminated her to avoid paying for her impending liver transplant.
The TPA’s arguments for ERISA preemption failed because the plan participant’s state-law action could have been brought in the absence of an ERISA plan, the court held in Rose v. HealthComp, 2015 WL 4730173 (E.D. Calif., Aug. 10, 2015).
The Facts
Debra Rose had worked eight years at Harris Farms as an HR representative and was covered by the company’s self-insured health plan. Harris Farms was using HealthComp as its TPA.
The plan offered case management benefits to help the patient, family and physician to develop a plan of care; find alternative care options; and help the patient obtain needed equipment and services. A case manager from HealthComp had Rose sign a form authorizing it to access her medical record in this context.
As part of its services, HealthComp notified employers when it saw an employee’s health costs rise, with an estimate of future health costs. The TPA sent approximately nine such reports on Rose’s condition to Harris Farms.
In December 2011, Rose was hospitalized and placed on a liver transplant waiting list. In December 2012, HealthComp reported to Harris Farms that Rose’s need for a liver transplant had increased. Rose was fired shortly after her employer received that news.
After being fired, Rose sued her employer and closed her case management file with HealthComp. But after Rose sued, HealthComp continued to deliver information to Harris Farms in response to the employer’s questions about Rose’s health. Rose in turn sued the TPA.
She contended that HealthComp used the case manager’s data improperly by telling Harris Farms about her need for a transplant without her permission. The TPA moved the action to federal court, saying ERISA preempted the state-law claims.
She moved to remand her suit to state court, arguing that her state-law privacy and unfair business practices allegations were not preempted by ERISA. The preemption question hinged on whether the privacy violation charge could have been brought under ERISA and whether a legal basis for her charges existed, independent of ERISA.
Plan effort to preempt fails
While the complaint could have been brought under ERISA, the state-law cause of action arose independently of an ERISA plan, the court found.
Therefore, the situation failed to meet the second prong of the preemption test, even though it satisfied the first. Note: The preemption test originally was set out in Aetna Health v. Davila, 542 U.S. 200 (2004).
ERISA Problem Seen
The court noted that under ERISA,
a plan administrator shall discharge its “duties with respect to a plan solely in the interest of the participants and beneficiaries” exclusively for the purpose of “providing benefits to participants and their beneficiaries; and defraying reasonable expenses of administering the plan … in accordance with the documents and instruments governing the plan.
The TPA accessed Rose’s health information ostensibly to help her arrange and perfect her care. Instead, the TPA passed the information on to Harris Farms, resulting in her termination and loss of health coverage. Thus, HealthComp failed to act in the interest of the employee/patient, and instead acted in the employer’s interest. That conduct could be seen as an actionable breach of fiduciary duty, under ERISA’s enforcement provisions.
The court said this case was different from a ruling from the 4th U.S. Circuit Court of Appeals in which health information was collected not for plan operations, but with the sole purpose of determining whether an employee was a threat to her co-workers.
State-law Charge Had Independent Basis
Nevertheless, the plan’s effort to preempt failed, because the alleged invasion of privacy implicated a law not depending on the administration of an ERISA plan.
Rose argued that the California Constitution creates an enforceable right of privacy, specifically intended to prevent disclosure of personal information. She said the duty in the California Constitution was wholly independent of ERISA.
HealthComp argued the alleged data misuse occurred in the course of administering an ERISA plan, and the cause of action arose exclusively from ERISA plan terms.
While the collection of Rose’s data was part of ERISA plan operations, the court stated that ERISA is not meant to provide “blanket immunity” from “garden variety torts” that only “peripherally impact daily plan administration.”
The legal standard used by the 9th Circuit is: “If the ERISA plan did not exist, there would be no cause of action.” But in this case, Rose’s privacy and unfair business practices complaints under state law could have been brought regardless of the disposition of any claim for benefits processed by HealthComp, and regardless of any case management work performed by the TPA, the court held.
Therefore, the court ruled that Rose’s state-law charges arose independently of ERISA plan terms, and ERISA did not preempt Rose’s state-law charges.
The court sent the case back to state court.
For more information about ERISA preemption in health plans, go to Section 740 of the Employer’s Guide to Self-Insuring Health Benefits.