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American Manufacturers Mutual Insurance Co. v. Sullivan

March 03, 1999

AMERICAN MANUFACTURERS MUTUAL INSURANCE COMPANY, ET AL., PETITIONERS V. DELORES SCOTT SULLIVAN ET AL.


Court below: 139 F. 3d 158

SYLLABUS BY THE COURT

Syllabus

OCTOBER TERM, 1998

AMERICAN MFRS. MUT. INS. CO. v. SULLIVAN

NOTE: Where it is feasible, a syllabus (headnote) will be released, as is being done in connection with this case, at the time the opinion is issued. The syllabus constitutes no part of the opinion of the Court but has been prepared by the Reporter of Decisions for the convenience of the reader. See United States v. Detroit Timber & Lumber Co., 200 U. S. 321, 337.

SUPREME COURT OF THE UNITED STATES

AMERICAN MANUFACTURERS MUTUAL INSURANCE CO. et al. v. SULLIVAN et al.

Certiorari To The Unitd States Court Of Appeals For The Third Circuit

No. 97-2000.

Argued January 19, 1999

Decided March 3, 1999

Under Pennsylvania's Workers' Compensation Act, 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 insurer must pay for all "reasonable" and "necessary" medical treatment. To assure that only medical expenses meeting these criteria are paid, and in an attempt to control costs, Pennsylvania has amended its workers' compensation system to provide that a self-insured employer or private insurer (collectively insurer) may withhold payment for disputed treatment pending an independent "utilization review," as to which, among other things, the insurer files a one-page request for review with the State Workers' Compensation Bureau (Bureau), the Bureau forwards the request to a "utilization review organization" (URO) of private health care providers, and the URO determines whether the treatment is reasonable or necessary. Respondents, employees and employee representatives, filed this suit under 42 U. S. C. §1983 against various Pennsylvania officials, a self-insured public school district, and a number of private workers' compensation insurers, alleging, inter alia, that in withholding benefits without predeprivation notice and an opportunity to be heard, the state and private defendants, acting "under color of state law," deprived respondents of property in violation of due process. The District Court dismissed the private insurers from the suit on the ground that they are not "state actors," and later dismissed the state officials and school district on the ground that the Act does not violate due process. The Third Circuit disagreed on both issues, holding, among other rulings, that a private insurer's decision to suspend payment under the Act constitutes state action. The court also noted the parties' assumption that employees have a protected property interest in workers' compensation medical benefits, and held that due process requires that payment of medical bills not be withheld until employees have had an opportunity to submit their view in writing to the URO as to the reasonableness and necessity of the disputed treatment.

Held:

1. A private insurer's decision to withhold payment and seek utilization review of the reasonableness and necessity of particular medical treatments is not fairly attributable to the State so as to subject the insurer to the Fourteenth Amendment's constraints. State action requires both an alleged constitutional deprivation caused by acts taken pursuant to state law and that the allegedly unconstitutional conduct be fairly attributable to the State. E.g., Lugar, v. Edmondson Oil Co., 457 U. S. 922, 937. Here, while it may fairly be said that the first requirement is satisfied, respondents have failed to satisfy the second. The mere fact that a private business is subject to extensive state regulation does not by itself convert its action into that of the State. See, e.g., Blum v. Yaretsky, 457 U. S. 991, 1004. The private insurers cannot be held to constitutional standards unless there is a sufficiently close nexus between the State and the challenged action so that the latter may be fairly treated as that of the State itself. Ibid. Whether such a nexus exists, depends on, among other things, whether the State has provided such significant encouragement, either overt or covert, that the choice must in law be deemed to be that of the State. E.g., ibid. That the statutory scheme previously prohibited insurers from withholding payment for disputed medical services and no longer does so merely shows that the State, in administering a many-faceted remedial system, has shifted one facet from favoring the employees to favoring the employer. This sort of decision occurs regularly in the legislative process and cannot be said to "encourage" or "authorize" the insurer's actions. Also rejected is respondents' assertion that the challenged decisions are state action because insurers must obtain "authorization" or "permission" from the Bureau before withholding payment. The Bureau's participation is limited to requiring submission of a form and related functions, which cannot render it responsible for the insurers' actions. See id., at 1007. Respondents' twofold argument that state action is present because the State has delegated to insurers powers traditionally reserved to itself also lacks merit. First, the contention as to delegation of the provision of state-mandated "public benefits" fails because nothing in Pennsylvania's constitution or statutory scheme obligates the State to provide either medical treatment or workers' compensation benefits to injured workers. See, e.g., Jackson v. Metropolitan Edison Co., 419 U. S. 345, 352; West v. Atkins, 487 U. S. 42, 54-56, distinguished. Second, their argument as to delegation of the governmental decision to suspend payment for disputed medical treatment is supported by neither historical practice nor the state statutory scheme. That Pennsylvania originally recognized an insurer's traditionally private prerogative to withhold payment, then restricted it, and now (in one limited respect) has restored it, cannot constitute the delegation of an exclusive public function. See Flagg Bros., Inc. v. Brooks, 436 U. S. 149, 162, n. 12. Finally, respondents misplace their reliance on a "joint participation" theory of state action. Privately owned enterprises providing services that the State would not necessarily provide, even though they are extensively regulated, do not fall within the ambit of that theory. E.g., Blum, supra, at 1011; Burton v. Wilmington Parking Authority, 365 U. S. 715, and Lugar, supra, distinguished. Pp. 7-17.

2. The Pennsylvania regime does not deprive disabled employees of "property" within the meaning of the Due Process Clause of the Fourteenth Amendment. Only after finding deprivation of a protected property interest does this Court look to see if the State's procedures comport with due process. Mathews v. Eldridge, 424 U. S. 319, 332. Here, respondents contend that state law confers upon them such a protected interest in workers' compensation medical benefits. However, under Pennsylvania law, an employee is not entitled to payment for all medical treatment once the employer's initial liability is established, as respondents' argument assumes. Instead, the law expressly limits an employee's entitlement to "reasonable" and "necessary" medical treatment, and requires that disputes over the reasonableness and necessity of particular treatment be resolved before an employer's obligation to pay -- and an employee's entitlement to benefits -- arise. Thus, for an employee's property interest in the payment of medical benefits to attach under state law, the employee must clear two hurdles: He must prove (1) that an employer is liable for a work-related injury, and (2) that the particular medical treatment at issue is reasonable and necessary. While respondents have cleared the first hurdle, they have yet to satisfy the second. Consequently, they do not have the property interest they claim. Goldberg v. Kelly, 397 U. S. 254, 261-263, and Mathews, supra, at 332, distinguished. Pp. 17-20.

139 F. 3d 158, reversed.

Rehnquist, C. J., delivered the opinion of the Court, Parts I and II of which were joined by O'Connor, Scalia, Kennedy, Souter, Thomas, and Breyer, JJ., and Part III of which was joined by O'Connor, Kennedy, Thomas, and Ginsburg, JJ. Ginsburg, J., filed an opinion Concurring in part and Concurring in the judgment. Breyer, J., filed an opinion Concurring in part and Concurring in the judgment, in which Souter, J., joined. Stevens, J., filed an opinion Concurring in part and Dissenting in part.

The opinion of the court was delivered by: Chief Justice Rehnquist

Opinion of the Court

AMERICAN MFRS. MUT. INS. CO. v. SULLIVAN

____ U. S. ____ (1999)

NOTICE: This opinion is subject to formal revision before publication in the preliminary print of the United States Reports. Readers are requested to notify the Reporter of Decisions, Supreme Court of the United States, Washington, D. C. 20543, of any typographical or other formal errors, in order that corrections may be made before the preliminary print goes to press.

On Writ Of Certiorari To The United States Court Of Appeals For The Third Circuit

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.

I.

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 insurer*fn1 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).*fn2 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.*fn3 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.*fn4 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.*fn5 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.*fn6 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, ...


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