American Manufacturers Mutual Insurance Company v. Sullivan, __ U.S. __, __ S.Ct. __, L.Ed.2d __, 1999 U.S. LEXIS 1711 (March 3, 1999)
Pennsylvania has a typical workers' compensation system in which employers are held liable without fault for work-related injury to employees (subject to certain exceptions such as employee misconduct or fraud in the claim). In return, the employee's rights of compensation against the employer for such injuries are determined "exclusively" by the remedies of the workers' compensation statute. The employee may not sue the employer for additional damages beyond those set forth in the prevailing schedule of benefits under the prevailing workers' compensation statute.
To ensure that workers' compensation claims are paid, Pennsylvania requires that the employer obtain private insurance, obtain insurance from the State Workers' Insurance Fund, or obtain state permission to self-insure. If liability for a work-related injury is not at issue, the statute requires that employers or insurers pay the "reasonable" and "necessary" medical expenses of the employee within 30 days after receiving the bill. Once the insurer has paid the medical provider, the matter is final. The insurer may not seek reimbursement even if it comes to find that the charges were unnecessary or excessive.
However, the reasonableness or necessity of a medical bill may be challenged under a system of "utilization review" in which the insurer (or self-insuring employer) files a notice with the Workers' Compensation Bureau of the Department of Labor and Industry. The Bureau then notifies the parties of the requested review, which is conducted by a private "utilization review organization," which is comprised of licensed health care providers for the type of treatment at issue. The URO then determines "whether the treatment under review is reasonable or necessary for the medical condition of the employee" according to "generally accepted treatment protocols," with any doubts to be resolved in favor of the employee. See 7 Pa. Stat. Ann. [Sections] 127.470(a); 127.467, 127.471(b). The statute also requires that the review be completed within 30 days. If the insurer prevails, the employee may seek to have the decision overturned by a workers' compensation judge or further judicial review by the general jurisdiction courts of the state. If the employee prevails, the insurer must pay immediately with 10 percent interest on the money and must also pay the costs of the review itself.
A class of employees subjected to utilization review challenged the statute as an unconstitutional deprivation without adequate due process of law of their property right to receive prompt payment of medical benefits. The United States Court of Appeals for the Third Circuit agreed and specifically found that the utilization review procedure was faulty in that it did not notify the employees themselves of the insurer or employer's challenged and did not give the employees a right to participate in the procedure and defend the reasonableness and necessity of their medical bills. See 139 F.3d 158 (3d Cir. 1998). As a result, Pennsylvania changed its review procedures.
Insurers did not challenge the "new, improved" procedures designed to give injured employees notice and opportunity to be heard. However, workers' compensation insurers did successfully petition for Supreme Court review of the constitutional premises underlying the employees' victory. Specifically, insurers and employers argued that the review procedure was not "state action," that is, conduct by the state government or its agents that subjects the state to scrutiny and regulation under the Due Process Clause of the United States Constitution. Due process requirements, when applicable, require that a person not be deprived of a property interest without notice and opportunity to be heard in a timely manner and reasonable fashion before a sufficiently neutral and qualified factfinder. …