American Manufacturers Mutual Insurance, et al. v. Delores Sullivan, et al. (03/03/1999)

By: Gina George, Medill News Service

Questions presented

(1) Whether private companies providing Workers Compensation insurance to private employers become ""state actors"" for purposes of the Due Process Clause when they elect to use a state-authorized utilization review procedure. (2) Whether the Due Process Clause requires Workers Compensation insurers to pay disputed medical bills prior to a determination that the medical treatment was reasonable and necessary.

Brief

The Pennsylvania Workers Compensation Act guarantees that employees who are injured on the job or suffer from diseases they develop because of their job are entitled to Workers Compensation benefits. All employers are required to self-insure or provide benefits through a private insurance company or the State Workmens Insurance Fund.

If an insurer receives a bill from a medical provider for an employee it believes does not require treatment, it can begin a utilization review process to contest the benefits.

Once the utilization review process begins, the insurer has the option to stop benefits to the employee until the matter is resolved.

Employees are notified that their benefits are under review, but they are not told that their benefits may be stopped. They have no input in the utilization review, and they are not instructed how to appeal the termination of their benefits.

The insurers ability to stop these benefits without notice and without any input from the employee is what triggered a complaint by Delores Scott Sullivan and nine other individuals. They were joined by two organizations — the Philadelphia Area Project on Occupational Safety and the Philadelphia Federation of Teachers.

They sued state officials responsible for administering the Workers Compensation Act, the director of SWIF, the School District of Philadelphia, and several private insurance companies.

Sullivan and her co-plaintiffs claimed that the Act violates employees 14th Amendment due process rights because it allows state actors to take away ""property,"" or medical benefits, without notice or a meaningful opportunity for employees to be heard.

The fedeal district court dismissed Sullivans claim against private insurance companies because it ruled that they were not state actors and were therefore not bound by law to provide due process.

The district court dismissed Sullivans claim against the school district and the state, ruling that depriving medical benefits was not the same as depriving an employee of the means of their subsistence and therefore did not constitute property protected under the 14th Amendments due process requirements.

The 3rd Circuit Court of Appeals reversed, holding that medical benefits are protected by the 14th Amendment.

The court also held that private insurance companies are state actors because ""they are providing public benefits which honor state entitlements. In effect, they become an arm of the state, fulfilling a uniquely governmental obligation under an entirely state-created, self-contained public benefit system.""

The states interest in containing costs by not awarding benefits to employees whose claims were questionable until proven otherwise was not supported by the court, which held that it was more important to make sure disabled individuals were not wrongfully deprived.

The courts opinion outlined a remedy to the defects in the Workers Compensation Act and the state has since changed its procedures. The state now notifies employees that their benefits are under review and in danger of being terminated. Employees now have the opportunity to submit an argument for their benefits in writing before they are cut off.

State officials, the self-insured School District of Philadelphia, and a group of private insurers filed three separate appeals.

The U.S. Supreme Court granted certiorari on Sept. 29, 1998 to the private insurers appeal, and allowed the National Association of Waterfront Employers, et al. to file an amicus brief in the case.

On March 3, 1999, the Court reversed. Writing for the 8-1 majority, Chief Justice William Rehnquist held that 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 14th Amendment's constraints. In noting that 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, the Court found that there was not 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. The court rejected Sullivan's argument that state action was present because the state had delegated to the insurers powers traditionally reserved to itself.

The Court also held that Pennsylvania's statutory scheme did not deprive disabled employees of ""property"" within the meaning of the Due ProcessClause of the 14th Amendment.

Justice John Paul Stevens concurred in the judgment, noting he agreed with ""much of what the Court has written."" But he declined to join in its opinion for two reasons, writing that the majority ""incorrectly assumes that the question whether the insurance company is a state actor is relevant to the controlling question whether the stateprocedures are fair,"" and ""fails to answer either the question whether the states procedures were fair when the case was filed or the question whether they are fair now.""