American Manufacturers Mutual Insurance Company v. Sullivan - Oral Argument

Argument of Michael W. McConnell

Chief Justice Rehnquist: We'll hear argument first this morning in No. 97-2000, American Manufacturers Mutual Insurance Company v. Delores Scott Sullivan.

Mr. McConnell.

Mr. McConnell: Mr. Chief Justice, and may it please the Court:

As you know, in this case there are two questions presented, one having to do with the State action doctrine, one having to do with procedural due process.

And although my clients could prevail on either of these theories, I'd like to begin by urging this Court to reach both of these questions.

Certainly the Court has authority to reach both because even if the private insurance companies are found to... not to be State actors and, thus, to have no further liability in the case, there do remain other parties in the case, the Commonwealth of Pennsylvania, and the School District of Philadelphia, and they are... they are certainly affected by the due process holding in and of itself.

But more important...

Chief Justice Rehnquist: Have they petitioned, Mr.... Mr. McConnell?

Mr. McConnell: They did petition.

Their petitions were denied.

They are, of course, parties in this Court pursuant to this Court's rules.

More important, from our point of view, is the effect upon the system in Pennsylvania were this Court to leave... to affirm on the State action question but to leave the due process holding of the Third Circuit in place.

There is a single, comprehensive, integrated workers' compensation system in Pennsylvania that involves both government employers and private employers, both private insurance companies and a government insurance company with exactly the same rules and obligations applying to all of them and, very importantly, with risk sharing among them in the form of assessments that are... that are put into a fund for the purpose of dealing with the... with the risk of providing... of medical providing of unnecessary and unreasonable care.

Should...

Justice Ginsburg: Mr. McConnell, from what you've said, it seems to me that if the due process question were decided in your favor... as you mentioned, you have the State insurance fund in there and public employers.

If the due process question is decided in your favor, isn't the State action question academic?

Mr. McConnell: Your Honor, that may very well be true.

I do think that the State action question is logically prior, and so I assume that the Court must reach that question first, but in terms of full relief... excuse me.

Chief Justice Rehnquist: That was the way we decided Jackson v. Metropolitan Edison.

We have the State... we decided the State action question first because we thought it was prior, but we did not go on to decide the due process question.

Mr. McConnell: Yes, Your Honor, although in the... in the San Francisco Athletic case, the Gay Olympics case, the Court did both decide a State action question and the First Amendment question which was logically related to... to the two.

So, the Court... the Court certainly has authority...

Justice Kennedy: Leaving... leaving later generations to say that one-half or the other is dictum.

Unidentified Justice: [Laughter]

Mr. McConnell: Lower courts, fortunately, aren't free to say that, Justice Kennedy.

Well, if I can now turn to the State action issue.

At stake in this doctrinal question is whether to constitutionalize major aspects of the administration of workers' compensation and other State mandated but not State provided insurance and employment... and employee benefit programs.

If these issues involve State action, then quintessential questions of regulatory policy that are now decided by private parties subject to regulation by the State will become the regular business of the Federal courts.

Justice Kennedy: What's your best argument to distinguish Tulsa Professional Collection?

It seems to me to be one of the cases that's closely on point.

Mr. McConnell: Well, Your Honor, in... in Tulsa... an ordinary private citizen, such as the administrator of an... of an estate does not have the power to... to end, to cut off the rights of their creditors.

That is not something that private citizens can do on their own.

In Tulsa, they go to the State and the State provides the active assistance that enables them to accomplish this result, that is, cutting off their creditors' claims, that they couldn't do on their own.

In our case, by contrast, private companies regularly withhold the payments to... pending resolution of... of disputes.

There's no need for government assistance.

This is something which is done in the private realm on a regular basis.

In fact, what goes on in our case...

Justice Kennedy: So, the distinction is between cutting it off all together and simply deferring payment?

Mr. McConnell: Well, Your Honor, it has to do with... what the... what the private party can do is withhold payment pending some kind of legal process that comes down the road, which is, of course, the standard practice with insurance.

If you have... if you're involved in a fender bender and you have a dispute with your insurance company, the insurance company will decline to pay, and then... and you will have some sort of a cause of action against the insurance company.

That is all that's going on in this case.

In fact, rather than State assistance in this case, all we have is... is a limitation on what would otherwise be the perfectly private right of a private company to withhold payments pending resolution of a private dispute.

And the Court was very clear in Jackson, as well as other cases, that regulation of private activity does not make that activity into... into State action.

Justice O'Connor: Well, that is true if you focus just on the specific action here, to wit, failing to pay benefits while you determine if it's reasonable or necessary.

But if you look at the compensation... workers' compensation scheme in a broader fashion, it is true, is it not, that Pennsylvania deprives people of their private State tort action as part of the overall workmen's comp scheme?

Does that bring this any closer to State action?

Mr. McConnell: Well, Your Honor, workers' compensation is a substitute for private tort, but that seems to support our contention that this is private action.

Workers' compensation has a different set of substantive rules, no-fault liability, instead of negligence liability, and has a somewhat different set of procedurals, a streamlined administrative procedure instead of having to go to court.

But in other respects, it remains the liability of private employers to their workers for work-related injuries.

The obligation is not an obligation of the State of Pennsylvania.

The obligation is a... is an obligation mandated by the State, but a private obligation imposed upon the employer and then insured by the... by the insurance company.

Justice Ginsburg: But you've pointed out the unseemliness of having two regimes.

The State fund, which certainly is a State actor... to bring them together, if you're right on the due process... well, if you're wrong on the due process point, we wouldn't get to the due process point for your... on your theory of State action.

We wouldn't because it might be advisory.

Mr. McConnell: I don't think that's correct, Justice Ginsburg.

If we're wrong on our theory of State action, then the due process issue is certainly presented.

Justice Ginsburg: Yes, but if you're right on your theory of State action.

Mr. McConnell: If we're right on our theory of State action, we still have... there are still parties before this Court who are bound by the judgment of the Third Circuit and who are confessedly State actors.

Justice Scalia: Well, you say...

Mr. McConnell: And this Court certainly has the authority to... to reverse the Third Circuit.

Justice Scalia: If you're right on your theory of State action, you say you're also right on your theory of due process.

And we've certainly given more than one reason for our outcome in... in other cases.

Justice Ginsburg: Well, if you're right on your theory of State action, you wouldn't get involved with due process because you wouldn't be a State actor.

Mr. McConnell: Your Honor, we would not.

However, other parties that are still present within this Court under this Court's rules remain bound by the due process holding of the...

Justice Souter: But there would be... wouldn't there be a financial effect on... on you depending on the due process outcome?

Because in... as I understand the scheme, you all contribute to the fund for, whatever you call it, recoupments by companies that pay and then later are determined not... not to have been liable, so that the amount that you have to contribute to that fund will vary, I suppose, depending on how the due... could vary, depending on how the due process point comes out.

Mr. McConnell: That's exactly right, Justice Souter.

The... the risks of... of these mispayments, that is payment for medical care that turns out not to be... not to be reasonable and necessary, is borne by the system as a whole, private insurers as well as public insurers.

So, we have a direct financial interest in the outcome as applied to the government parties in this case as well.

But as this... as the discussion so far has already indicated, that this case is a... does not involve a traditional public function in any... in any sense.

That is to say, neither the provision of workers' compensation nor the specific decision in this case to suspend payments in what amounts to a commercial dispute is traditionally a public function, let alone an exclusive public function.

Moreover, the decisions made here are not mandated by the State.

Even the Third Circuit concedes that it is totally up to the insurance companies whether to invoke utilization review.

But what's more, they are not even significantly assisted by the State.

They are regulated by the State, to be sure; that is to say, that the State is involved in... in requiring certain filings and in... and in requiring a prompt payment and in setting forth a particular form of dispute resolution mechanism.

But those are limitations on what would otherwise be the private authority of...

Justice O'Connor: Mr. McConnell, would you clarify one thing for me?

Under the Pennsylvania system, is it possible that the insurer might pay for treatment, let's say, chiropractic treatments, over a period of months and then conclude maybe it should suspend further payment and raise the question of whether it's reasonable and necessary?

Mr. McConnell: Yes, Justice O'Connor.

The assumption here is that a course of medical treatment that's appropriate in one month is not necessarily reasonable or necessary in some other period.

Justice O'Connor: Is every payment a new issue, if you will, or not?

Mr. McConnell: Every bill...

Justice O'Connor: Or... or does that add up to some sort of expectation on the part of the patient?

Mr. McConnell: Well, every bill is a new payment, Your Honor, and so when the doctor submits the bill, the insurance company decides whether... if there's no question about its appropriateness, they simply pay within the 30-day period.

If they believe that there's some question, then they submit it for utilization review and withhold payment pending that.

And that brings us to the due process issue, because I'd like to be... like to talk about what is the impact on the individual worker of this kind of a... of a... of an arrangement.

Note that the...

Justice O'Connor: Yes, because if the worker were receiving some kind of a series of medical treatments and thought at least that it was helping and then, all of a sudden, it suspended, is there some kind of a... an expectation that we have to weigh in the balance?

Mr. McConnell: Well, Your Honor, I don't think that people automatically assume that just because they've been receiving a course of treatment that it necessarily is going to be something that they have forever.

But let me be more specific about that because I think it's important to distinguish between the effect on the treatments that have already been received and then for the future.

For those that have already been received, the worker is essentially not affected.

The question is, is the doctor going to be paid?

The focus of this litigation has been on the indirect effect, the fear that because of the process being invoked, that their medical provider might choose not to provide further treatments in the future.

And the Third Circuit seemed to operate on the assumption that a suspension in payment was tantamount to terminating the medical benefits, but I think any reflection upon that will show that that is simply not the case.

What the medical provider has to do, the medical provider becomes on notice that someone is going to be examining the reasonableness and necessity of the course of treatment.

And that medical provider will continue to provide the treatment if he believes that an impartial process will conclude that it's reasonable and necessary.

It's only in the case where the medical provider himself realizes that the bill in the end is likely not to be payable that... that the medical... that the course of treatment will be... not be provided.

But, Your Honor...

Justice Ginsburg: Do you say this as a matter of logic or experience?

There are other States that have a similar regime.

Has it, in fact, turned out that doctors are concerned about not being paid by anyone and so indeed suspend treatment?

Mr. McConnell: Your Honor, I think it's a matter of the logical implication of this... of this statutory scheme.

The doctors will be paid if the conclusion of... of full process is that the... that the medical procedures are reasonable and necessary, and they will be compensated for the delay in payment by 10 percent annual interest.

The only reason that the doctor would... or the provider would not continue treatment is if he had some doubt about the... the outcome of that proceeding.

And far from being a denial of due process, Your Honor, I would submit that is exactly what we want health care providers to be thinking about, that is, is the course of treatment that... that I'm proposing reasonable and necessary.

And by putting...

Justice Souter: Well, the... the provider may simply say, I think it's reasonable and necessary and I think I'll win at the end of the day, but I'm not interested in spending my time litigating.

This... this is simply a patient I don't want to bother with.

It's too much trouble.

Mr. McConnell: Well, Your Honor, if that amounts to a due process violation on the part of the worker, then any scheme...

Justice Souter: Well, I'm not sure it amounts to a violation.

I'm simply saying that it is... it is... it is... it is one of the factors that I think have got to be considered in assessing the interests involved.

Mr. McConnell: Well, Your Honor, any scheme that... that requires the doctor to justify the treatment is going to have that effect.

Even if we paid in advance, subject to recoupment, the doctor would have to spend time litigating.

So, that is not a product of this particular scheme.

The only thing this particular scheme does is that it forces the health care provider to... to bear the risk that at the end of the day the... the care that he's providing may not be within the statutory limits.

Justice Breyer: Am I right about the scheme?

I'm... I'm just trying to be sure I understand it.

Is it the case... suppose a worker is... everybody agrees he's... he was injured at work.

And he... his doctor submits a bill that is absurd.

Let's imagine trips to Florida, whatever it is, totally absurd.

The law is that the medical insurer has to pay that bill unless he files a piece of paper, according to this scheme, and if he files that piece of paper, the State sends it to a doctor, another doctor, who looks at it for reasonableness, and then there are further proceedings that take place.

In other words, unless he submits that piece of paper, he has to pay.

Mr. McConnell: Exactly.

Justice Breyer: If he submits the piece of paper, he doesn't have to write a check.

He doesn't have to pay a penny...

Mr. McConnell: That's exactly right.

Justice Breyer: Thank you.

Mr. McConnell: That's exactly right.

It's so reasonable as a system that it is...

Justice Ginsburg: How does it compare... how does it compare with the determination of the disability, if there's a disagreement between the patient's doctor... let's say the question is, is this person totally disabled or only partially disabled?

Is he temporarily disabled or permanently disabled?

Is there the same thing when there's a disagreement for immediate suspension?

Mr. McConnell: No, there's not, Your Honor.

That's... it is assumed that once the person is disabled, that they remain eligible for the disability benefits until the insurance company has invoked a process and... and until after that process has been complete.

Justice Ginsburg: The payments would continue during the process.

Mr. McConnell: The payments would continue in the interim.

Justice Scalia: If the insurer unreasonably filed this piece of paper and unreasonably delays payment and causes some injury to the patient in that fashion, does the patient have a cause of action?

Mr. McConnell: No, Your Honor.

Because this is workers' compensation, the liability, both for the employer and for the insurer, is strictly limited to... within the workers' compensation scheme.

Other outside forms of liability are... are preempted.

Justice Scalia: Against the insurer as well as the employer.

Mr. McConnell: That's the way I understand the law.

Justice Stevens: May I ask if... if on review of a... of a decision by the insurance company to terminate payments, is that... is that de novo, or does one side or the other have the... have the presumptively correct?

Mr. McConnell: Within the utilization review process itself, if the... it's... it's de novo, but that unless the... but there's an effect of presumption in favor of the care because if the utilization reviewer is unable to determine whether or not it is reasonable and necessary, he must find that it is.

Justice Kennedy: How would you describe the employee's legal interest in the case?

A claim or an anticipatory claim?

Because the Third Circuit said it was an entitlement, which seems to me somewhat of a loose use of that term.

But how do you describe what the employee has?

Mr. McConnell: Justice Kennedy, I believe that what the... the employee is a third party beneficiary of... of a contract between his employer and the insurer.

But I don't believe that anything hinges upon that characterization.

I'd like to...

Justice Stevens: May I... just one quick question.

If you win on the State action issue, that would mean you... you could cease giving notice to the employee.

That's what would really be at issue here I suppose.

Mr. McConnell: The actual notice to the employee is given by the State and not by the insurance company.

So, I don't know that the notice would be affected by that.

Justice Stevens: That's the revised procedure where the State gives the notice.

Mr. McConnell: If the State sends the notice to the employee.

I'd like to reserve the remainder of my time.

Argument of Malcolm L. Stewart

Chief Justice Rehnquist: Thank you, Mr. McConnell.

Mr. Stewart, we'll hear from you.

Mr. Stewart: Mr. Chief Justice, and may it please the Court:

The Government agrees with the petitioners both that the withholding of payments under the workers' compensation scheme is not State action and that even if the insurers were regarded as State actors, the scheme would comport with due process.

As to the State action question, in our view the insurance company's actions under the Pennsylvania workers' compensation statute are no different in principle from an insurance company's actions in any other context.

That is, the company gets the claim in order to determine whether it believes itself to be liable for payment.

It must undertake an internal process of studying the facts, studying the laws, deciding what its rights and obligations are.

If the company determines that it's not liable for payment, the... it withholds payment, the consequence may well be the triggering of a State adjudicatory mechanism.

And the conduct of that adjudicatory mechanism may well involve considerable State action, but the insurer itself is not a State actor.

And the only difference between the Pennsylvania workers' compensation scheme and other insurance contexts is that a slightly different legal standard applies: fault if the employer's fault is not at issue and, second, the onus is on the insurer to invoke the utilization review process, whereas in the normal context, as... as Mr. McConnell pointed out, if the insurance company denies a claim, it would be up to the... the claimant to file suit or undertake other remedies

And I think more generally we could analogize the insurance company to the defendant in any private civil action.

That is, whenever somebody is sued for money, the defendant will first be required to make an internal determination as to whether it considers itself to be liable.

It will have to decide whether to concede liability, enter into settlement negotiations, or undertake to defend against the suit on the merits.

But the... the defendant's, the private defendant's, decision to insist upon judicial resolution of the dispute doesn't amount to State action.

Again, the conduct of... the resolution of the lawsuit by courts and juries will involve State action, but the private party who participates in... in the dispute is not a State actor.

And in our view, the mistake that the Third Circuit made was in focusing on the quantity of the contacts between the insurance company and State officials during the URO process.

That is, the Third Circuit pointed out that the... the insurance company is required to file a form with the bureau.

It will be required to... to file other documents in connection with the URO process itself.

Again, the same thing is true of any other civil action between private parties.

There's extensive connection, interaction between the parties and the court in the sense that they file briefs and pleadings, but the private parties are not thereby engaged in State action.

Justice Ginsburg: Is the UR examiner a State actor?

Mr. Stewart: We believe that it is.

Certainly the workers' compensation judge who made the... the final determination would be a State actor and we believe that the UR... that the utilization review organization would also be a State actor because it is...

Justice Ginsburg: Who is the... who is the URO?

Is it a private doctor, a group of private doctors?

Mr. Stewart: My understanding is that they are organizations which will... they will be selected at... at random.

They will assign the... the case to doctors in the same or a similar specialty.

They are... they are private people.

They are not full-time State employees.

But in our view they would be exercising delegated authority from the State, performing a classic adjudicatory function of resolving a dispute between private parties.

So, we think that the UR itself would be a State actor, but neither the insurance company nor the provider would become a State actor simply by contesting the... the question before the UR.

Justice Kennedy: So, if the UR cut off notice... cut off plans without any notice, then you'd have a Tulsa Collection case.

Mr. Stewart: Well, certainly if... if... to take the easiest example, if the doctors on the... if the utilization review organization was composed of people who had a financial interest in the outcome of the dispute, you would have a classic due process violation because the UR itself would be subject to procedural due process rules.

Its resolution of the dispute might or might not affect a party's constitutional rights.

I think what's... what's crucial in this case with respect to the due process issue is that, at least as the case comes to this Court, there is no dispute as to the adequacy of the procedures by which the UR and the workers' compensation judge will make the ultimate determination as to whether expenses are reasonable and necessary.

That is, the plaintiffs do not contend that the State procedures, at least as modified by the new notice that the State is giving, fail to provide an adequate mechanism for making that determination in the end.

Their only complaint is with the withholding of payment by the insurer, pending the UR's determination of the dispute.

And in our view, as... as Mr. McConnell said, that's a practice that is consistent with the way that ordinary dispute resolution typically works.

That is, when a person has a claim against him for money, the usual rule is that the person can withhold payment pending resolution of the dispute.

And in a sense, the... the workers' compensation scheme here is more favorable to the employee and the doctor than the typical rule would be because if the... if the doctor prevails before the UR, if the UR makes the determination that the care is reasonable or necessary, the insurance company is required to pay at that time, even if the insurance company intends to seek further review before the workers' compensation judge.

So, the State doesn't even allow the insurer to wait until the final resolution of the dispute.

The State has simply said the insurance company doesn't have to make payment until some neutral arbiter has agreed with the health care provider that particular services are reasonable or necessary.

The only type of exception to the general rule that this Court has recognized in... is in cases such as Goldberg v. Kelly where a claimant has initially established all the prerequisites to entitlement to a stream of benefits and where State officials attempt to cut off those benefits on the ground that circumstances have changed such that the individual has become disentitled, and in that context, the Court has said that procedural due process protections apply, that there is a deprivation of property.

But here, the initial determination that the worker is eligible for workers' compensation, that he was injured on the job and has become disabled does not itself imply any determination as to the reasonableness or necessity of any particular course of treatment.

So, when the... the UR... when the insurer invokes the UR to determine that question, it's not asking to... for a ruling that circumstances have changed, that something which was originally established is no longer true.

It's simply asking for an initial determination that a particular course of treatment is reasonable or necessary, and in our view that's fully consistent both with the... the typical dispute resolution process and with constitutional due process principles.

If there are no further questions.

Argument of Loralyn McKinley

Chief Justice Rehnquist: Thank you, Mr. Stewart.

Ms. McKinley, we'll hear from you.

Mr. McKinley: Mr. Chief Justice, and may it please the Court:

Before I address the legal issues that are before the Court, I'd like to clarify a few things about the workers' compensation system in Pennsylvania and how the utilization review processes actually work.

Workers' compensation in Pennsylvania is a no-fault system which was substituted for the claimant's right to sue their employer for... in tort for work-related injuries.

It is an exclusive system.

Not only is the worker precluded from suing the employer for negligence or any other common law action that he might have had prior to the passage of the act, but the individual is trapped into the system.

The individual is not permitted to go outside of the system to secure medical treatment.

So, while utilization is going on, regardless how long that might take... and as the experience of the named plaintiffs indicates, it can take years to be resolved.

During that...

Justice Ginsburg: But you are only contesting the time before the URO, as I understand it.

Once the URO makes its determination and it goes to the ALJ... the URO procedure itself doesn't take years, does it?

That takes 30 to 70 days.

Mr. McKinley: Well, the process itself is integrated.

The utilization review process is part of the State system for the determination of disputes over reasonableness and necessity of medical care.

The utilization review process is the first step, but if the utilization review organization makes an adverse decision to the claimant, which is made without notice to the claimant and without an opportunity for the claimant to be heard...

Justice Ginsburg: Well, we... we've over that now because I think it's taken as given under the new State notice.

There is notice.

There is an opportunity to submit something in writing.

So, I thought that the issue was only suspending payment in the interim.

And my question is, how long is the interim you are challenging?

I... I probably misunderstood you then because I had assumed that you were talking about the URO determination, and if that determination were adverse, you were not saying that there was a due process right to continue to get paid after that.

I thought you were just talking about the URO period.

Mr. McKinley: I think, Justice Ginsburg, that you raised two separate issues.

The first issue, as to the Commonwealth defendants, obviously there is a final order by the Third Circuit, the petition this Court was denied.

The Commonwealth has changed its procedures, but there's still an issue as to whether the Third Circuit ought to be reversed based on its due process findings in which there was no notice and no opportunity to be heard.

That is what the petitioners have requested in this case.

The second question has to do with the impact of the request for utilization review and the suspension of payments that results.

Once the utilization review organization makes its decision, it then goes into another aspect of the State system, and during that entire process, from the minute the utilization review is invoked until the appeals are completed, the person is not able to receive medical treatment unless they can find a doctor that can treat them for free.

Justice Ginsburg: Yes, but if one... I understand your argument to say this person's own doctor thinks they should be paid, and until the utilization review person makes a determination, it isn't fair to take these benefits away.

But once that determination is made by an independent, private examiner, then it seems to me it's a separate question, that it isn't all one.

Something significant has changed once the URO says that's an unreasonable charge.

Mr. McKinley: All right.

We agree that under the present as the State has revamped the... the procedures after the Third Circuit's decision, once the utilization review organization makes that determination, there has been due process and there's nothing that the claimant can do about it.

Justice O'Connor: Right.

Justice Ginsburg: So, we're not talking about years.

We're talking about... the only due process claim you can and are making is the one that concerns the URO process, and that doesn't go on for years.

Mr. McKinley: It goes on for months.

The individual... I'm sorry.

Go ahead, Justice Breyer.

The utilization review is invoked by the insurance carrier.

There are no...

Justice Ginsburg: The briefs say 30 to 70 days.

Mr. McKinley: There are no limits as to how...

Justice Ginsburg: Is that... is that 30... is that accurate...

Mr. McKinley: No.

We don't think it is accurate.

Justice Ginsburg: that the statute says 30 days, but it can go...

Mr. McKinley: It's clearly not 30 days.

As you can see from the experience of the named plaintiffs in the... in the complaint, there are no limits as to how long it takes the State to refer the... or the request to the utilization review organization.

Justice Ginsburg: Where did the 30 to 70... the average is something like 70 days...

Mr. McKinley: I have no idea, Your Honor, because this case was dismissed on a 12(b)(6) and there is no record.

After the decision goes to the utilization review organization, they have 60 days because they have 30 days to acquire the records, 30 days to make a decision.

It then goes back.

The decision is circulated.

So, it often takes more than 30 or 60 days in order for this process to be completed.

And during that process, which takes at least 2 and a half months at the best... at best, the individual is precluded from receiving medical treatment unless... unless the doctor is willing to provide the treatment for free.

Justice Scalia: Wait.

I don't understand.

Where did that... why is that different from what... from what would have obtain under the system which you say workers' compensation replaced?

You began by saying that you've been forced into this system from a private tort system.

Mr. McKinley: Right.

Justice Scalia: Now, in a private tort system, couldn't the same thing happen?

Couldn't the insurer just simply say I don't think this is a proper claim and I'm not going to pay it?

Mr. McKinley: Yes, but this is not a private tort system.

This is clearly a public benefit system.

Pennsylvania, by any...

Justice Scalia: Well, but... but you... you don't claim you're any worse off than... than what you would have been like without workmen's comp....

Mr. McKinley: Not without workers' comp...

Justice Scalia: I mean, in fact, you might have to wait years until completion of... of all the appellate proceedings in... in a private tort suit...

Mr. McKinley: But...

Justice Scalia: against the insurer.

Mr. McKinley: But in that system you don't have a public benefits system, which we clearly do in this situation.

Justice Breyer: What about any medical?

I mean, all of us have medical insurance.

I thought you said twice we're talking about a person who doesn't... you were talking about a patient who won't get treated.

Mr. McKinley: That's correct.

Justice Breyer: I thought that this was about reimbursing the doctor.

I mean, all of our doctors might not get reimbursed if the insurer decides the treatment they're getting is unreasonable, but that hasn't stopped my doctor from treating me.

And I... and I... and I don't... I don't know... maybe I've mixed this up.

That's why I'm asking you.

But I... I thought we were talking about the doctor running the risk that the insurer won't reimburse him if the insurer considers the bill unreasonable.

And... and are there a lot of doctors who... whom that fact discourages from giving treatment?

There might be.

Mr. McKinley: There are certainly many doctors...

Justice Breyer: It doesn't discourage yours or mine, does it?

Mr. McKinley: Well, I... I can't say about yours or mine, Your Honor, but clearly in this situation, as the experience of most of the named plaintiffs indicates, doctors don't treat unless they're going to get paid within the... within the...

Justice Breyer: You know, but they'll get paid for what the insurer considers reasonable.

So, are the plaintiffs in this case... were... were the plaintiffs... I'm interested.

I'm not asking rhetorically.

Were they... were they... did they... were they denied treatment?

Mr. McKinley: Yes.

Justice Ginsburg: Why?

Mr. McKinley: They were.

Justice Scalia: I thought 5 out of the 10 continued to receive treatment?

Mr. McKinley: No, it wasn't five.

I believe it was three.

Three of the named plaintiffs received treatment.

Others did not receive any treatment during the years that it took to resolve the utilization review... the utilization review request.

And I would like to point out that there's a typographical error in our brief at page 5 and 6 on the statute.

Part of Act 44, which imposed the preclusion upon a claimant from even going outside the system, but if the claimant wins the lottery, the claimant still can't for medical treatment while this medical process is going on.

It should say 531... section 531(7) instead of 531(i).

Chief Justice Rehnquist: Well, to say... to say you can't go outside the system, I mean, that's really true long before workmen's compensation came in.

You can, if you're injured without a workmen's compensation, depend on private tort law.

You know, you can pay your own expenses if you want to, but in order to get reimbursed for your medical expenses, you have to follow the procedure of suing in court or compromising with the insurer.

Mr. McKinley: That's correct, Your Honor, but Pennsylvania substituted that system.

They put in place a public benefit system in which the...

Justice Ginsburg: Why do you...

Mr. McKinley: plaintiffs have a property interest.

Justice Kennedy: Just a minute.

Chief Justice Rehnquist: Slow down, will you?

Justice Breyer: What do you gain for your case by calling it a, quote, public benefit, closed quote, system?

Mr. McKinley: We think that it changed the nature of the property right.

Clearly a State can't have a public benefit system in which it does not ensure due process.

They have to...

Justice Scalia: What do you mean by public benefit system?

Justice Ginsburg: What's a public benefit system?

Mr. McKinley: I mean a system that is guaranteed by State law, which is administered by State law, in which all of the criteria, all of the... the payments, the nature of the payments, the amount of payments, when the payments can be made, when they can be stopped, the administration, everything is controlled directly by the State.

Justice Souter: Why isn't that essentially true of a tort system?

I mean, the State determines the content of tort law, the obligation to pay, the procedure by which the... the payment obligation may be contested.

It's... I mean, in each case the system, it seems to me, is equally a public benefit system on... on your... on your theory.

Mr. McKinley: What the petitioners are basically analogizing this to is car insurance and other kinds of private commercial insurance.

That's not what this is.

Justice Souter: Yes, but what about the answer... what about the answer to my question?

It seems to me that every feature that you've just described under the comp system, as... as being a reason for calling it a public benefit system, is a feature that you could equally describe in the same terms under the traditional tort system.

Mr. McKinley: No, because it's not guaranteed.

This system guarantees coverage...

Justice Souter: Well, it... it guarantees, if one determines eligibility, for the coverage.

Mr. McKinley: That's correct.

Justice Souter: And the tort system guarantees payment if one fulfills the conditions before a finder of fact or a jury for... for liability and damages.

And in each case, the State sets the criteria for payment.

One is a no-fault system, the other is not.

But each, in effect, is equally imposed by the... by the State I would suppose.

Mr. McKinley: What the State has done is to substitute that system.

The plaintiff does not have to go through that process in order to be determined eligible.

All they have to do is to... to sustain a work injury.

And each of the...

Chief Justice Rehnquist: Well, now, just a minute.

You have to show that under traditional workmen's comp that the injury arose out of and in the course of your employment, don't you?

Mr. McKinley: That's correct, and there is no...

Chief Justice Rehnquist: So, there's a criteria just as there is in tort law where you have to show negligence.

It's not as if you could simply be injured and automatically get coverage.

Mr. McKinley: But for the purposes of utilization review, all of that is assumed.

The insurance carrier cannot dispute whether the person is eligible for workers' comp....

Chief Justice Rehnquist: But... but your argument is that this is a public benefit system, and I... I think the question suggests that we're curious as to know why that makes it different analytically from the traditional tort system.

Mr. McKinley: Because the State has the duty, in the context of this system, which it has imposed on itself.

Clearly the State can't just delegate to the insurance company the right to...

Chief Justice Rehnquist: Well, what... what duty has the State imposed on itself?

Mr. McKinley: The State guarantees the benefit, number one.

The State guarantees that the benefits will be paid, that there is a source for the payment of those benefits through several different mechanisms, and...

Chief Justice Rehnquist: Are you... are you saying that if... if the workmen's compensation insurer should default, then the State comes in and itself makes the payment?

Mr. McKinley: Yes, I am saying that.

Pennsylvania has a security fund that does just that.

What we're...

Justice Souter: Is the security fund appropriated public money or is the security fund a fund established by contributions of insurers?

Mr. McKinley: I'm not exactly sure how it works, but I know that...

Justice Souter: Well, it would make a difference, though, I would think to your argument, wouldn't it?

Justice O'Connor: Yes.

Mr. McKinley: I don't think it does, Your Honor.

I don't think it makes any difference whether the State says to the insurers we're going to tax you, you have to pay us a certain amount of money every year in order to insure coverage like they do in unemployment, for instance, or whether they say, you have to go out and get this insurance yourself, and if you can't get it on the private market, we will provide it for you through our State workers' insurance fund to make sure it's there.

Justice Breyer: Basically what I think is worrying at least me is if you were to win this case on the State action point, what about Blue Cross-Blue Shield?

What about accident insurance in Massachusetts where, after all, there is a State fund to pay for uninsured?

What about ERISA where there is a Government fund to pay for those people when the companies go bankrupt leaving a pension?

There are dozens of very complex regulatory schemes that involve insurance companies, some but not all of which have State backup funds.

They're all complicated.

They all regulate private employers up, down, and sideways.

All right?

Now, we just see one more here, and so, what's the difference between yours... or do you think that all private employer action or insurer action involving health care, involving pensions, et cetera, insurance of any sort that's regulated is government action?

Mr. McKinley: No, that is not what we're suggesting.

We've never suggested that.

What we have here...

Justice Breyer: Then what's the difference?

Mr. McKinley: is a unique context in which the benefits are guaranteed.

The State can say to you...

Justice Breyer: They're guaranteed in ERISA.

They are guaranteed in Massachusetts in respect to uninsured motorists.

There are... it's common to have State money backing up insurance that's given by private people.

Mr. McKinley: But you have to look at the way the statute works.

In those situations, the insurance company does not have to invoke a legal process like it does in this context because we're not talking about a commercial setting.

The insurance company and the State are intertwined in the delivery of these benefits to... to injured workers and in the way those benefits are terminated, if and when they are...

Justice Ginsburg: But does due process require the particular scheme Pennsylvania has?

I mean, suppose Pennsylvania had said, we're going to have a workers' compensation scheme, but we're going to have a check on the reasonableness of the bill before it's paid, and that's the statute.

And so, they set up this checking office and you never... the worker, the doctor... doesn't get paid until the State official says that's okay.

Would that be a violation of due process?

Mr. McKinley: Well, certainly if the individual is precluded from receiving treatment during that time...

Justice Ginsburg: Not precluded from receiving treatment, certainly not.

And the State's position is our system is meant to work fairly.

If a doctor's charge is fair and reasonable, we'll pay it promptly.

And they have time limits on how long this review can take place, but nobody gets paid up front without any check.

Would that be unconstitutional?

Does due process require that the provider's word be accepted?

Mr. McKinley: I don't think it necessarily does.

But in the context of this... of this system, we have a system that vests a property right in the individual.

Prior to the act... prior to Act 44, the insurance carriers...

Justice Ginsburg: Well, I wish you address my question.

Let... let's take my hypothetical scheme that the doctor's bill goes to a checker and it is not paid until the checker says okay.

Is it unconstitutional to run a workers' compensation system that way?

Mr. McKinley: I think it would depend on how it works.

For instance, if you have a situation like the named plaintiffs here, where they've been receiving treatment for sometimes years for very serious work injuries...

Justice Scalia: No.

Justice Ginsburg: I wish you would focus on mine...

Mr. McKinley: I'm trying to.

Justice Ginsburg: Nothing is going to happen for years because there's going to be a check on each bill.

And so, there won't be a payment unless a stop signal is given within 30 days.

But there will be... in other words, you will have to get a green light instead of this system that Pennsylvania now has where a red light can be turned on.

Mr. McKinley: I think as long as it's quick, very quick, and as long as the individual has a right to be heard and the treatment is not stopped during a lengthy process, probably that system will be constitutional, but clearly that's not what we have here.

Act 44...

Justice Ginsburg: I don't know what you mean by the treatment not stopping because I've given you... my question is, must there be payment first during litigation or can there be like it would be in the tort system?

You get paid eventually if you're right, but there's no immediate right to be paid.

Mr. McKinley: It doesn't necessarily have to be that... that way... you're correct... as far as a due process... for due process purposes.

But in this particular context, what we have is a situation in which claimants had a vested entitlement to their medical treatment prior to Act 44.

That... that treatment could not be stopped by an insurance carrier.

The insurance carrier in this case is relying upon the authority of State law which is delegated to them through the passage of this act.

That's why the direct challenge to the law is so important here.

It is State power that is being exercised in a way that was never permitted to be exercised before.

The State always exclusively controlled the circumstances under which an insurance carrier could stop paying medical treatment and...

Justice Scalia: Excuse me.

Are you saying that your answer to Justice Ginsburg's question, which was that it would have been okay, would change if the State had initially had a system in which it paid the medical bills... in which the insurer had to pay the medical bills immediately and then changed to a system in which for everybody, nobody gets any payment until the medical bills are substantiated?

In the latter situation you say it would be unconstitutional because the earlier statute had conferred a vested right to get the payment immediately.

Mr. McKinley: What I'm saying is that in this context what we have is a transfer of State power from the State to the insurance carrier.

Chief Justice Rehnquist: No.

Justice Scalia: I want you to answer my question.

Chief Justice Rehnquist: You've been... you've been asked several questions, Ms. McKinley, and the people who have asked them have felt you haven't answered them.

Try to answer to questions directly.

Mr. McKinley: I'm attempting to do that.

I'm sorry.

Could you repeat your question?

Justice Scalia: The question is... you recall Justice Ginsburg's question, a State system in which you don't get any payments until you establish that... that it was reasonable medical care.

As I understand your position, you say that's okay because there was no vested right anyway from the beginning.

Mr. McKinley: Right.

Justice Scalia: Would your answer to that question be different if Justice Ginsburg's system were imposed by the State after the State had initially had a system in which you could get your medical payments immediately?

And then the State found out too many of them were unreasonable, so it said, we're changing the system.

From now on you don't get any payments until after you've established... you've established... that it's reasonable and necessary.

And in that situation, would your answer to Justice Ginsburg be different?

Mr. McKinley: I'm not sure it would be different.

What... I think what you're getting at is...

Justice Scalia: Well, what I'm getting at is it seems to me you say that once a State passes a statute enacting a certain welfare scheme, everyone has a vested interest in that welfare scheme, and any change from it... I mean, it's your characterization that it's a welfare scheme.

I'm not sure I agree with it, but assuming it is, any change from that original welfare scheme is the elimination of a vested right and is therefore invalid.

Mr. McKinley: Not necessarily.

Not necessarily.

It depends upon the nature of the property interest that the State has conferred to begin with.

And in this situation, what we had was a State conferring a property interest that could not be divested without the State itself making a determination that the treatment was not reasonable and necessary.

Justice Souter: No, but the... I think you're saying, though, that the State cannot change its law.

Maybe we misunderstood your argument.

I understood your argument to be something like this, that in the original State... the... the version of the workmen's comp scheme that preceded this one, there was an obligation of immediate payment.

There was... there was no option, in effect, to... to file the protest as there is now.

And I understood you to say that that was the reason why the State could not go to the scheme that it has gone to without providing this... this prior notice and hearing.

And it sounds to me as though what you're arguing is that, in effect, the State cannot change its law, that there is a due process reason that forbids the State to make it harder to get the benefit, that due process is a one-way ratchet.

If... if that's not your argument, then I think probably all of our questions could be forgotten.

Mr. McKinley: No.

That's not our argument.

We've never suggested that the State can't change the context under which an individual receives public benefits.

Justice Souter: Then what is the relevance of the fact that in the scheme prior to the modification that is in question here, there was an obligation to pay without an option to withhold payment under protest?

What is the relevance of that for your argument?

Mr. McKinley: Because the nature of the property interest hasn't changed.

There's no dispute that these individuals...

Justice Souter: But the nature of the property interest was derived from the State law, wasn't it?

Mr. McKinley: It was and...

Justice Souter: And now the State law has changed and you have agreed with me that the State can change its law.

There's no due process right to... to have the law continue.

And that's... so, that's why I... I don't follow your argument.

Mr. McKinley: Well, there's no due process right to necessarily have the law always be the same, but in this context, you have a State system providing public benefits to individuals.

The State has to ensure due process in that system.

We have never suggested that the State does not have the right to come in and say we need to contain costs in the system.

We've never said that that...

Justice Ginsburg: It sounds like you're saying that if the State is more generous, then it's going to be saddled with the due process obligations that it wouldn't have if it had been less generous to the worker.

Mr. McKinley: No.

The State always has the due process obligation.

That's the whole point.

The State...

Justice Ginsburg: But you have just said if the State doesn't pay up front, if it says we want proof before we pay any bill, then you wouldn't have your claim about no suspension.

Due process wouldn't require it.

But if the State says, we're going to pay but if it turns out that we think it's getting unreasonable, we'll stop.

That... that's what's the hardest thing for me to accept about your due process argument.

You seem to say the State could do anything it wants.

It doesn't have to pay any bill without a check.

You told me that.

But once it is more generous in paying immediately, then it has these extra requirements.

Mr. McKinley: We don't have to... we don't have to even look at the prior statute before Act 44 to answer the question.

In the context of a benefit delivery system, the State always has to proceed... if they're going to use a State established procedure, which they clearly have here, due process has to be included in that process.

This Court has said that over and over again.

You can't have a State established procedure...

Justice Ginsburg: My question is what process is due, and you told me that in a case of... that the State could say, we'll check every bill, and that wouldn't violate due process.

So, why is it different when they say we'll start by paying, but if we think it's unreasonable, we'll stop?

Mr. McKinley: Because you're taking away a vested property right, and that's what the problem is, through a State established procedure.

This Court has said over and over again that when you have a State established procedure and a private individual...

Justice Ginsburg: So, if you were to prevail, an appropriate answer for the State would be to say, we're going to move this checking system up and we're not going to pay any bill without... without determining as insurers... isn't that the way insurers ordinarily work?

They don't pay you just on... you call up and say something happened to me.

I want to be paid.

Mr. McKinley: I think that's correct.

That's in a completely different system, in a commercial system where the tort laws clearly are in place.

But that...

Justice Stevens: Let me get into these hypotheticals for a second.

Do I correctly understand that it's your... your theory that once the State has started to make payments, they have, in effect, given the injured worker a property right that cannot be terminated without following certain due process procedures.

That's the essence of your argument, as I understand.

Mr. McKinley: That's exactly what I'm saying.

Justice Stevens: But can one not respond by saying the right is not an unlimited right to continued payment forever.

The right is merely a right to continue payment until the... until a serious question is raised, that it's inherent... it's a limitation on the right rather than a termination of the right that the request for review triggers.

Mr. McKinley: That's correct.

We've never said that they can't have a utilization review system.

That's perfectly fine as long as the individual has an opportunity to be heard and notice of the... of the process until... until that happens.

If the evidence shows that treatment is not reasonable and necessary, we've never suggested that they have a right to continue having treatment forever.

That has never been our argument.

All we've said is that the individual requires notice and an opportunity to participate before the suspension takes place.

Justice Breyer: Well, is that then... is it different in your... I take it the same statute, the same scheme applies whether the insurer protests the first bill or whether he protests the 18th bill.

Mr. McKinley: That's correct.

Justice Breyer: But you're only talking about the second and subsequent bills.

Mr. McKinley: That's... that's really the... that's really where the problem comes in.

Justice Breyer: You're not talking about that first bill.

It's as if the insurer pays the first... if he doesn't pay the first bill, you say that has nothing to do with your case.

Mr. McKinley: Because you don't have... you don't have...

Justice Breyer: Is that right?

Justice Scalia: Am I right?

Justice Breyer: Am I right?

Mr. McKinley: That's correct.

I think that's correct.

You don't have an interruption in something that the person has and believes that they have.

And... and the State hasn't vested a property interest in that individual.

Justice Breyer: All right.

Then... then I guess from the State's point of view, it becomes difficult for them to decide what this due process right does or does not apply to because there will be... you know, there will be a series of medical bills and they won't all be for the same thing, and the... the insurance company will protest some and they won't protest others.

And which one does this apply to and what's a continuation of a payment?

Oh, I mean...

Mr. McKinley: Well...

Justice Breyer: How in your mind is all that stuff sort itself out?

Mr. McKinley: The real... the real problem comes in in the way the cost containment actually works and what they're really focusing on is ongoing treatment and the experience of the named plaintiffs shows that.

We have people that have serious work injuries, people who are going to need treatment for the rest of their lives.

They're receiving therapy...

Justice Breyer: All right, but you see... I understand that.

My question was just how in your view is it supposed to work in terms of sorting out the people for whom this is a continuation of treatment and those for whom it's a new treatment and those for which it's a new treatment in some... do you see the problem?

Mr. McKinley: Well, there are...

Justice Breyer: I'm just asking you how you've sorted that out...

Mr. McKinley: There are...

Justice Ginsburg: in your mind.

Mr. McKinley: There are precertification provisions in the act for that particular thing.

Precertification provisions.

For instance, if an individual wants to have an MRI and the insurance company isn't sure, they can... there is a precertification provision in the statute so that they can take a look at it before the MRI even happens.

So, you don't have to worry about it.

What really happens and what the insurance carriers are really targeting their behavior toward in this case is the ongoing treatment, the treatment in which people have a vested interest.

And in order for them to stop it, they cannot do it by themselves.

This is not a self-executing statute.

Justice Breyer: Is there anything in the Third Circuit's opinion that says what it's talking about is limited simply to those situations in which there has been an ongoing set of treatments of the same sort that now the company wants to terminate?

Mr. McKinley: No, I don't believe there's anything...

Justice Breyer: So, as far as we're concerned, we're dealing with an opinion that applies as much to the first treatment as to the last treatment.

Mr. McKinley: Except that it's not...

Justice Scalia: Is that right?

Mr. McKinley: Yes, but it doesn't...

Justice Breyer: That's right, okay.

Mr. McKinley: really work that way.

That's... that's what I'm trying to tell you.

I would like to go back to Justice Kennedy's point about Tulsa because it's our position that for State action purposes, Tulsa controls this case.

This is a case in which the statute is not self-executing.

The insurance company has to invoke a State established procedure in order to interrupt the property interest at stake here, and the State remains substantially involved in that procedure.

The petitioners would like to divorce the decision to initiate the process from the process itself, and we submit to you that that is not appropriate.

This process is a State process from start to finish...

Justice Kennedy: Of course, in Tulsa, the claim was cut off completely.

Mr. McKinley: Yes, but...

Justice Kennedy: Here there's just a procedure established to defer its adjudication.

Mr. McKinley: Yes, but this Court has said time and time against that interim deprivations of property are subject to due process constraints just as complete deprivations of property.

It goes to the nature of what process is due, not whether process is due at all.

Justice Breyer: How in your opinion is the insurance company supposed to deal... in your opinion under the Constitution as you see it... with a claim that's clearly fraudulent, vastly overstated?

Is it supposed to just pay the bill?

The Constitution requires it to pay this bill regardless and then try to get its money back after these hearings, et cetera, or not?

Mr. McKinley: Well, first of all, outside of the system, they would clearly have the right to do that.

Chief Justice Rehnquist: I'm asking how you...

Mr. McKinley: But in this system, they should ask for utilization review, and they will...

Justice Breyer: Can you just say... do they have to pay the bill initially and then try to get the money back, even the clearly fraudulent ones?

Mr. McKinley: Yes, they do.

But, you know, the whole premise here is that what we have here is a huge system in which people are running around making fraudulent claims and doctors are running around giving fraudulent treatment.

That is ordinarily not the case.

We're not here suggesting that there are no claims out there like that.

What we are suggesting is that you can't throw the baby out with the bath water.

Rebuttal of Michael W. McConnell

Chief Justice Rehnquist: Thank you, Ms. McKinley.

Mr. McConnell, you have 1 minute remaining.

Mr. McConnell: I waive my time for rebuttal.

Chief Justice Rehnquist: Very well.

The case is submitted.