American Manufacturers Mutual Insurance Co. v. Sullivan

Brief Fact Summary. Injured workers are suing because medical payments were withheld under the amended workers’ compensation scheme. They allege that by withholding these benefits, insurers acting on behalf of the state, are depriving them of property in violation of due process.

Synopsis of Rule of Law. A close nexus between the state and a private actor exists if the state has exercised a coercive power or has provided such encouragement. However, action taken by private entities with the mere approval of the state is not state action

Facts. Injured workers are challenging Pennsylvania’s recent changes to its workers compensation system that requires a third party to review the medical treatment for appropriateness before payment is rendered.
The Pennsylvania Workers’ Compensation Act of 1915 requires all employers to (1) obtain insurance from a private insurer; (2) obtain insurance through the State Workers’ Insurance Fund or (3) obtain permission from the state to self insure.
Once a claim is made and is uncontested, the insurer must pay for all “reasonable and necessary” medical treatment related to the workplace injury.
To contain costs, a “utilization review” procedure was implemented in 1993. This required that all treatments be reviewed for reasonableness and necessity by a utilization review organization (URO).
The Respondents are 10 individual employees and 2 employee organizations including Sullivan (Respondents), who claim that medical payments were withheld pursuant to the utilization review and deprived them of property in violation of due process.
The District Court dismissed the action against the private insurers because they were not “state actors.” But, the Court of Appeals for the Third Circuit disagreed stating, “the state has enacted a complex and interwoven regulatory web enlisting the Bureau, the employers, and the insurance companies.”

Issue. Can a private insurer’s decision to withhold payment for disputed medical treatment in a state’s workers’ compensation system be attributed to the state as “state action”?

Held. No. Private insurers are state actors only if there is a sufficiently close nexus between the state and the challenged action by the insurer.
Workers’ compensation insurers for the state of Pennsylvania are not “state actors” under the 14th Amendment.
The state’s workers’ compensation regime does not deprive disabled workers of property.

Discussion. The Respondents argue that the insurers are state actors because the state regulation encouraged the utilization review and the withholding of payments. But the decision to withhold payment is completely within the control of the insurer. The state does not provide utilization review guidelines, nor does it participate in the review process. Therefore, a case for entanglement between the state and the insurer cannot be established as it was in Burton.