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Sullivan v. Barnett

March 13, 1998

DELORES SCOTT SULLIVAN; WILLIAM BATTLE; ANTHONY CANCILA; CHARLES MATTHEWS; CHRISTOPHER COSTELLO; LISA LEX; SUSAN HANSEN, ON THEIR OWN BEHALF AND ON BEHALF OF ALL SIMILARLY SITUATED CLASS PLAINTIFFS; PHILADELPHIA AREA PROJECT ON OCCUPATIONAL SAFETY AND HEALTH; THE PHILADELPHIA FEDERATION OF TEACHERS, LOCAL 3, AFL-CIO
v.
ROBERT BARNETT, SECRETARY OF LABOR AND INDUSTRY FOR THE COMMONWEALTH OF PENNSYLVANIA; FRANK BEAL, DIRECTOR OF THE PENNSYLVANIA BUREAU OF WORKERS COMPENSATION; CONSTANCE B. FOSTER, INSURANCE COMMISSIONER FOR THE COMMONWEALTH OF PENNSYLVANIA; CATHERINE BAKER KNOLL, TREASURER, COMMONWEALTH OF PENNSYLVANIA; JOHN P. O'MALLEY, DIRECTOR, STATE WORKERS' INSURANCE FUND; AMERICAN MANUFACTURERS MUTUAL INSURANCE COMPANY; CIGNA CORPORATION; CONTINENTAL CASUALTY COMPANY; USF&G INSURANCE COMPANY; ZURICH AMERICAN INSURANCE COMPANY; SCHOOL DISTRICT OF PHILADELPHIA; JOHNNY J. BUTLER, SECRETARY OF LABOR AND INDUSTRY OF THE COMMONWEALTH OF PENNSYLVANIA; RICHARD A. HIMLER, DIRECTOR OF THE PENNSYLVANIA BUREAU OF WORKERS COMPENSATION; COMMERCIAL UNION INSURANCE COMPANY; DONEGAL MUTUAL INSURANCE COMPANY; HARTFORD INSURANCE COMPANY DELORES SCOTT SULLIVAN, WILLIAM BATTLE, LOUIS BAUMGARTNER,* ANTHONY CANCILA, WILLIAM C. DILLON,* TERRENCE ERVINE,* CHARLES MATTHEWS, CHRISTOPHER COSTELLO, LISA LEX, SUSAN HANSEN, PHILADELPHIA AREA PROJECT ON OCCUPATIONAL SAFETY AND HEALTH AND PHILADELPHIA FEDERATION OF TEACHERS, APPELLANTS



On Appeal from the United States District Court for the Eastern District of Pennsylvania (D.C. No. 95-cv-00201) Argued Thursday, September 11, 1997

Before: Mansmann, Nygaard and Garth, Circuit Judges

The opinion of the court was delivered by: Garth, Circuit Judge:

* pursuant to Rule 12(a) FRAP

Opinion filed March 13, 1998

OPINION OF THE COURT

The issue we must address on this appeal is whether Pennsylvania's Workers' Compensation Act, 77 Pa. Const. Stat. Ann. § 531(5) and (6) (West Supp. 1997), which provides for the supersedeas of an employee's medical benefits without prior notice or an opportunity to be heard, violates the requisites of procedural due process. We hold that it does. Accordingly, we reverse.

I.

The Pennsylvania Workmen's Compensation Act ("the Act"), 77 Pa. Const. Stat. Ann. § 1 et seq., establishes a

compulsory insurance system for employers that provides compensation to employees who sustain work-related injuries and occupational diseases without regard to an employee's negligence. See 77 Pa. Const. Stat. Ann. § 431. To guarantee the payment of an employee's claims, the Act requires employers to obtain insurance -- either through a private insurance carrier or through the State Workmen's Insurance Fund ("SWIF ") -- or to self-insure. See id. § 501. When an employer purchases insurance, the insurance company assumes the employer's statutory liabilities. See id. §§ 501, 701.

On July 2, 1993, the Pennsylvania legislature amended the Act by enacting Act 44. The purpose of Act 44 was to contain the spiraling costs of medical treatment for work- related injuries. Codified at 77 Pa. Const. Stat. Ann. § 531(5) and (6), Act 44 created a utilization review process under which the reasonableness and/or necessity of an employee's medical treatment could be reviewed. It is these provisions of Act 44 which create the utilization review process and the corresponding supersedeas that are challenged in this action. Utilization review is a process whereby medical providers assess the reasonableness or necessity of current, prospective, or past medical treatment.

Section 531(5) provides the mechanism by which utilization review is invoked. It states in pertinent part:

The employer or insurer shall make payment and providers shall submit bills and records in accordance with the provisions of this section. All payments to providers for treatment provided pursuant to this act shall be made within thirty (30) days of receipt of such bills and records unless the employer or insurer disputes the reasonableness or necessity of the treatment provided pursuant to paragraph (6) . . . .

77 Pa. Const. Stat. Ann. § 531(5) (West 1997) (emphasis added). Hence, an employer or insurer must pay an employee's medical expenses within thirty (30) days of receipt of the medical bills unless the employer or insurer requests utilization review. The decision to invoke utilization review is made independently by the employer or insurer.

A.

Section 531(6) outlines the utilization review process. Section 531(6) provides:

(I) The reasonableness or necessity of all treatment provided by a health care provider under this act may be subject to prospective, concurrent or retrospective utilization review at the request of an employe, employer or insurer. The department shall authorize utilization review organizations to perform utilization review under this act. Utilization review of all treatment rendered by a health care provider shall be performed by a provider licensed in the same profession and having the same or similar specialty as that of the provider of the treatment under review. Organizations not authorized by the department may not engage in such utilization review.

(ii) The utilization review organization shall issue a written report of its findings and Conclusions within thirty (30) days of a request.

(iii) The employer or the insurer shall pay the cost of the utilization review.

(iv) If the provider, employer, employe or insurer disagrees with the finding of the utilization review organization, a petition for review by the department must be filed within thirty (30) days after receipt of the report. The department shall assign the petition to a workers' compensation Judge for a hearing or for an informal conference under [77 Pa. Const. Stat. Ann. § 711.1]. The utilization review report shall be part of the record before the workers' compensation Judge. The workers' compensation Judge shall consider the utilization review report as evidence but shall not be bound by the report.

77 Pa. Const. Stat. Ann. § 531(6).

Thus, utilization review is invoked when an employee,

employer, or insurer requests review of specific medical treatment performed.*fn1 The party seeking review submits its request to the Bureau of Workers' Compensation ("the Bureau") on a Bureau-prescribed form entitled "Utilization Review: Initial Request" ("Initial Request"). The Bureau reviews the Initial Request to ensure that it is properly completed -- i.e., that all information required by the form is provided. See 34 Pa. Code § 127.452. The Bureau's review of the Initial Request does not address the legitimacy or lack thereof of the request for utilization review.

If the Initial Request is improperly completed (i.e., does not provide all pertinent information requested by the form), the Bureau denies the request for review and sends the form back to the party. If the Initial Request is completed properly, the request is approved and the party requesting review must serve a copy of the Initial Request upon the remaining interested parties, including the employee, the employer, the insurer, and the health care provider, as appropriate. See 34 Pa. Code § 127.452.

At this point, according to the Act's regulations, an employer or insurer with a Bureau-approved request may suspend payment for the medical treatment in question. See id. § 127.208.*fn2 The Act does not require -- but permits -- suspension of medical benefits. In addition, medical providers are not forbidden from continuing to furnish medical services to employees who are subjected to such review, although any such treatment is rendered with the risk that the medical provider ultimately may not be compensated depending upon the resolution of the utilization review. Furthermore, although the employee is given notice that the Initial Request for utilization review has been filed, there is no indication on that form that an employee's medical benefits may be terminated for and during the disputed treatment. Further, the Initial Request does not provide any information or explanation regarding what utilization review entails.

After a request for review is properly filed, the Bureau randomly assigns the case to a Utilization Review Organization ("URO"),*fn3 and the Bureau again notifies all interested parties that the case has been assigned by sending out a Notice of Assignment form. See 34 Pa. Code § 127.453. The Notice of Assignment is a copy of the notice that is sent to the URO, advising the URO that a particular case has been assigned to it. The Notice of Assignment, like the Initial Request, does not inform employees that their medical benefits may be suspended nor does it advise employees of procedures under which their suspension may be protested.

The review process is narrowly tailored to the task of determining whether specific medical treatment is or was reasonable or necessary. Utilization review is conducted by a health care provider*fn4 who has "the same or similar specialty" as the provider who conducted the treatment in question. See 77 Pa. Const. Stat. Ann. § 531(6)(i). Accordingly, the reviewer must apply generally accepted treatment protocols to assess the reasonableness or necessity of the questioned treatment. See 34 Pa. Code § 127.467. The URO may not request, seek, or obtain independent medical examinations or reports. See id. § 127.461. Rather, the review is solely based upon the medical records of the treating medical provider and any discussions that the URO has had with the medical provider concerning the treatment. See id. §§ 127.461, 127.469.*fn5 Lastly, the URO's role is narrowly defined to address exclusively whether the medical treatment in question is reasonable and/or necessary. See 34 Pa. Code § 127.470.

The URO must assume that the employee's medical condition is a work-related injury. See id. In addition, the URO does not consider whether the employee is still disabled, whether the employee has obtained maximum medical improvement, or whether the fees charged are reasonable. As noted, the URO's exclusive function is to determine the reasonableness or necessity of the prescribed treatment in question.

The URO must issue a report of its findings and conclusions within thirty (30) days of a request. *fn6 See 77 Pa. Const. Stat. Ann. § 531(6)(ii). The written report must contain findings, Conclusions, and citations to generally accepted treatment protocols and medical literature, as appropriate. See 34 Pa. Code § 127.472. The URO sends the report to the Bureau which then sends a copy to all interested parties. See id. § 127.476. The employer or insurer pays for the initial utilization review. See 77 Pa. Const. Stat. Ann. § 531(6)(iii); 34 Pa. Code§ 127.477.

B.

Originally, Act 44 permitted reconsideration of the URO's determination if filed within thirty (30) days of the URO's report. See 77 Pa. Const. Stat. Ann. § 531(6)(iv). The review on reconsideration mirrored the initial utilization review except that a different URO conducted the review and the Bureau advanced the costs of reconsideration and subsequently billed the losing party. See 34 Pa. Code § 127.514. Thus, as with the utilization review, an employee could not testify before a URO concerning the medical treatment on reconsideration. Further, parties were not notified before invoking reconsideration review that they would be billed for the costs of reconsideration review if they lost.

If a party disagreed with the URO's determination on reconsideration, it could file a Petition for Review with the Bureau for de novo review before a Workers' Compensation Administrative Law Judge ("ALJ"). If the employee prevailed upon reconsideration, the supersedeas was lifted pending this de novo hearing. If the employee lost the reconsideration review, the supersedeas remained in effect. See id. § 127.208(f).

Even if the medical services provided were ultimately found to be reasonable and/or necessary, an employee's benefits could be suspended for a considerable length of time pending the initial utilization review, reconsideration, and de novo review by an ALJ. While the Act requires the initial utilization review to occur within thirty (30) days of a request, see 77 Pa. Const. Stat. Ann. § 531(5)(ii), and reconsideration to be filed within thirty (30) days of the URO's determination and decided within 30-35 days

thereafter, see 34 Pa. Code § 127.508, there is no time- frame specified for adjudication and resolution before the ALJ. Accordingly, employees could have waited months or even years without medical benefits before the reasonableness or necessity of their treatment was resolved.

In 1996, the Act was amended yet again by Act 57. Act 57 streamlined the utilization review process by eliminating the reconsideration process, thereby allowing for faster de novo review by an ALJ. Thus, after the initial URO issues its decision, the losing party no longer need seek reconsideration by another URO, but rather may petition for de novo review by an ALJ. Under Act 57, if the initial URO rules in favor of the employee, the supersedeas is lifted pending the ALJ's review. If the URO rules against the employee, the supersedeas remains in effect until after the ALJ renders his/her decision. See id. § 127.208(e). In all other material respects the provisions of Act 44 remained in effect and are not challenged here.

II.

The Plaintiffs (hereinafter, collectively "Sullivan") in the present § 1983 case are ten individual employees*fn7 and two organizations representing employees who claim that their medical benefits were suspended without regard to due process: the Philadelphia Area Project on Occupational Safety and Health ("PhilaPOSH"),*fn8 and the Philadelphia Federation of Teachers ("PFT").*fn9 Sullivan claims that the amendments to the Act violated the Plaintiffs' constitutional right to due process under the Fourteenth Amendment by permitting their employers and/or insurers to suspend the payment of their workers' compensation medical benefits without prior notice and without affording them an opportunity to be heard.*fn10 Sullivan filed the amended complaint in this action on May 21, 1996, three months before the amendments in Act 57 rescinding reconsideration review took effect.

The Defendants in this action include various state officials responsible for administering the Act ("the Commonwealth Defendants"),*fn11 the director of SWIF,*fn12 the School District of Philadelphia ("the School District"), and several insurance companies.*fn13

The insurance company defendants and the School District moved to dismiss the complaint on the grounds that there was no state action involved in suspending Sullivan's medical benefits.*fn14 Sullivan filed a motion for partial summary judgment on the issue that the insurers and the School District were state actors subject to the constraints of due process. In its opinion and order dated January 24, 1996, the district court ruled that the private insurers were not state actors, but at that time did not decide the state action issue with respect to the School District ...


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