American Manufacturers Mutual Insurance Co. v. Sullivan

526 U.S. 40 (1999)

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Nature of the Case

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Facts

Pennsylvania amended its workers' compensation system in 1993. 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. Under this system, if an insurer 'disputes the reasonableness or necessity of the treatment provided, it may request utilization review (within the same 30-day period) by filing a one-page form with the Workers' Compensation Bureau. 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. 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.' Upon the proper filing of a request, an insurer may withhold payment to health care providers for the particular services being challenged. The Bureau then notifies the parties that utilization review has been requested and forwards the request to a randomly selected 'utilization review organization' (URO). URO's are private organizations consisting of health care providers who are 'licensed in the same profession and have the same or similar specialty as that of the provider of the treatment under review.' The purpose 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.' Any doubt as to the reasonableness and necessity of a given procedure must be resolved in favor of the employee. URO's are instructed to complete their review and render a determination within 30 days of a completed request. 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. 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 reviews.

Respondents are 10 individual employees and 2 organizations representing employees who received medical benefits under the Act. They claimed to have had payment of particular benefits withheld pursuant to the utilization review procedure set forth in the Act. They sued alleging that, in withholding workers' compensation benefits without predeprivation notice and an opportunity to be heard, the state and private defendants, acting 'under color of state law,' deprived them of property in violation of due process. They sought declaratory and injunctive relief, as well as damages. The District Court dismissed the private insurers from the lawsuit on the ground that they are not 'state actors,' and later dismissed the state officials who remained as defendants, as well as the school district, on the ground that the Act does not violate due process, The Court of Appeals for the Third Circuit disagreed on both issues. It held that a private insurer's decision to suspend payment under the Act -- what the court called a 'supersedeas' -- constitutes state action. The court reasoned: The [State] extensively regulates and controls the Workers' Compensation system. Although the insurance companies are private entities, when they act under the construct of the Workers' Compensation system, 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 right to invoke the supersedeas, or to stop payments, is a power that traditionally was held in the hands of the State. The [State] is intimately involved in any decision by an insurer to terminate an employee's constitutionally protected benefits because an insurer cannot suspend medical payments without first obtaining authorization from the Bureau. Under the due process claim, the court held that payment of bills may not be withheld until employees have had an opportunity to submit their views in writing as to the reasonableness and necessity of the disputed treatment to the URO. The court then determined that the relevant statutory language permitting the suspension of payment during utilization review was severable and struck it from the statute.