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State Law Claim by Out-of-Network Physician Against Insurer Not Preempted by ERISA, Second Circuit Finds

On Behalf of | Jul 17, 2017 | Articles, Healthcare Law

By David A. Zarett, Esq.Email David

In a decision issued May 26, 2017, the United States Court of Appeals for the Second Circuit determined that a state-law claim for promissory estoppel brought by an orthopedic surgeon to compel payment for out-of-network surgeries was not barred by the Employee Retirement and Income Security Act (“ERISA”). In doing so, the Second Circuit reversed the determination of the Southern District of New York, from whom it had taken the appeal, and instructed that the case be remanded back to the New York State Courts for a determination on the merits. The case is McCulloch Orthopaedic Surgical Services, PLLC v. Aetna, Inc. [i]

The plaintiff, Dr. Kenneth McCulloch, had performed two knee surgeries on a patient who was a member of an Aetna health plan. McCulloch was an out-of-network provider who did not have a contract with Aetna to provide services at pre-determined rates. Consequently, prior to performing the surgeries, members of McCulloch’s office staff contacted Aetna to inquire about the patient’s out-of-network coverage and prospective reimbursement. The Aetna representative stated that McCulloch would be reimbursed at seventy percent of the usual, customary and reasonable rates, or $46,233.60. Based on this representation, Dr. McCulloch received a written assignment of benefits from the patient and performed the surgeries. The patient’s health care plan, however, provided that Aetna would not accept an assignment of benefits to an out-of-network provider without its consent.

Aetna eventually paid $15,267.51 for the surgeries. Dr. McCulloch then sued Aetna in New York State court on the theory of promissory estoppel, alleging that he detrimentally relied on the oral statements of the Aetna representative when he agreed to perform the surgeries, and demanded the difference between the amount paid and the amount he had been promised over the telephone. Aetna promptly removed the action to federal court, claiming that Dr. McCulloch’s state-law claim was preempted by ERISA as an action by a plan participant or beneficiary “to recover benefits due to him under the terms of his plan,” by virtue of the patient’s assignment of benefits to Dr. McCulloch.

Dr. McCulloch moved to have the action remanded back to the state court, but the District Court denied his motion and ruled that the state-law cause of action was preempted. An appeal was then taken by the Second Circuit, which analyzed the issue under a two-prong test developed by the Supreme Court of the United States in the case of Aetna Health Inc. v. Davila (the so-called Davila test) to determine whether ERISA preemption applied.

Under the first prong of the Davila test, the federal claim is required to have been brought by “an individual who, at some point in time, could have brought his claim under ERISA.” Dr. McCulloch argued that his claim did not meet the threshold because, as a result of the no-assignment clause in the patient’s Aetna contract, he never received a valid assignment of the claim. The court agreed, concluding that, due to the no-assignment clause, any purported assignment of benefits to Dr. McCulloch was legally void. Thus, Dr. McCulloch was never entitled to bring a claim under ERISA. To decide otherwise, the court reasoned, would deny Dr. McCulloch any remedy at all, because his state-law claims would be dismissed as preempted, and any federal claims would be dismissed for lack of standing (since the assignment was invalid).

The United States Department of Labor, in an amicus brief filed in a companion case, added that denying any prospective remedy to an out-of-network physician for nonpayment would present an unacceptable risk that such providers would simply decline those patients for fear of nonpayment by insurers. This reluctance would be contrary to Congress’s goals in enacting ERISA, which were enhancing employees’ health and welfare benefit coverage. The court also concluded that, because no valid assignment existed, McCulloch’s claim was not a “colorable claim for benefits” as envisioned by ERISA.

Although the fact that Dr. McCulloch could not have brought the lawsuit under ERISA was dispositive for the purposes of the appeal, the court continued on to state why Aetna had failed to meet the second part of the Davila test as well. Under the second prong, the claim must involve “no other independent legal duty that is implicated by a defendant’s actions” outside of those found in the plan. In other words, the question was whether the state-law cause of action being asserted was distinct from a duty under the ERISA plan. Because Dr. McCulloch’s quasi-contract claim did not depend on the terms and conditions of the Aetna plan, but rather alleged detrimental reliance on oral statements by an Aetna representative regarding future payment, the court found that McCulloch’s promissory estoppel claim, “[arose] not from an alleged violation of some right contained in the plan, but rather from a freestanding state-law duty grounded in conceptions of equity and fairness.”

Hence, McCulloch’s state-law claim was not preempted under ERISA, and would be remanded back to the New York court. The main takeaway here is that an out-of-network physician can potentially bring state-law claims against an insurer, even when an ERISA plan is involved.

Weiss Zarett Brofman Sonnenklar & Levy, P.C. is a Long Island law firm providing a wide array of legal services to the members of the health care industry, including corporate and transactional matters, civil and administrative litigation, healthcare regulatory issues, bankruptcy and creditors’ rights, and commercial real estate transactions.


[i] McCulloch Orthopaedic Surgical Servs., PLLC v. Aetna Inc., 857 F.3d 141 (2d Cir. 2017).