A FEDERAL appeals court ruling issued in New York this month could crucially weaken the multibillion-dollar managed care industry, the H.M.O. trade association contends. Spokesmen for employers said they were concerned that the decision could result in higher costs for health care.

But a spokesman for the American Medical Association hailed the decision, saying it meant that insurance companies would be held accountable if patients were harmed by delays and denials of approval for care.

The ruling, issued on Feb. 11 by a three-judge panel of the United States Court of Appeals for the Second Circuit, essentially said that Vytra Healthcare, a health plan based in Melville, N.Y., could not invoke the federal Employee Retirement Income Security Act, known as Erisa, to prevent Bonnie Cicio, the widow of Carmine Cicio, from suing Vytra in a New York State court, accusing Vytra of medical malpractice.

Mr. Cicio died of myeloma, a form of cancer, in 1998. Vytra had rejected his doctor's order for a double-strength transplant of bone marrow stem cells, contending that the treatment was experimental and thus not covered under his contract.

The Vytra medical director did approve a single-strength transplant after a delay that Mrs. Cicio's lawyer, David Trueman, said went "past his window of opportunity" to be effective. Michael Bernstein, a lawyer for Vytra, said the health plan would not comment on pending litigation.

Courts have widely held that lawsuits challenging a health plan's administrative decisions must be brought in federal court under the Erisa law and not in state court under state law. Erisa, however, severely limits a patient's right to bring such a claim.

But a growing number of rulings have recognized a patient's right to sue in state court if an H.M.O. refuses to pay for a specific treatment ordered by a physician.

Legal experts said the appeals court ruling expanded the meaning of important but ambiguous Supreme Court decisions on the rights of patients and the responsibilities of health maintenance organizations. The Second Circuit appeals court interprets law in New York, Connecticut and Vermont, and its rulings are often influential nationwide.

"This decision is very sweeping," said Karen Ignagni, president of the American Association of Health Plans, the main trade group for the managed care industry. "The health plan was making a determination about what is covered and what is not. If the court superimposes its view on the contract itself, it puts in doubt whether we can have any real contract negotiations."

William G. Schiffbauer, a legal consultant to health insurers, said "the end result could be fee-for-service medicine forever" and the end of managed care.

He said the ruling, if widely followed, would "essentially destroy the basic tool of contract implementation and place all payment decisions in the hands of the provider community." Once doctors decide that "something is necessary, the contract would have to pay for it," he said.

The A.M.A., which filed a brief in support of Mrs. Cicio, had a radically different view.

"This is a very important case in which the highest court in the country below the Supreme Court has completely pierced Erisa and said that insurance companies, just as physicians and hospitals and everyone else, have to be held accountable for their actions when those actions hurt people," said Dr. Richard Corlin, a former A.M.A. president.

Richard Blumenthal, the Connecticut attorney general, called the ruling "a very powerful landmark." He added: "We deal with these types of complaints literally every day, by calling the H.M.O. and saying, You're doing the wrong thing here; the doctor says it's medically necessary, and we hope you'll do the right thing. "

"Now," he said, "we can say, You are legally responsible for this decision because you are denying care despite the treating physician's decision.

"That's going to wake up a lot of these H.M.O. bureaucrats. The threat of liability is going to be very, very sobering for them."

The appeals court said a federal district court would now decide whether the facts in the Cicio case fitted the judges' interpretation of the law. If so, the case will be transferred to a New York State court. But Mr. Blumenthal said that determination "in this specific case is virtually irrelevant" for "enforcement of patients' rights" because the appeals court has now "established the principle" of H.M.O. responsibility.

A spokesman for the office of the New York attorney general, Eliot Spitzer, said it would have no comment while the Cicio ruling was being reviewed to assess its implications.

Clark Havighurst, an expert on health care contracts at Duke University law school, said the ruling was an example of "the increasing willingness of judges to bend principle in Erisa cases to reach desirable results."

In state courts, juries can award large amounts for punitive damages. Such damages are limited in federal court under the Erisa law, which has also been used to keep cases out of state courts. Patients often find it difficult to find a lawyer willing to accept a case if the lawyer sees a risk of only a limited payback for the time and research costs.

But Professor Havighurst said the appeals court's "idea that plan administrators can be guilty of medical `malpractice' is a stretch, since there is no doctor-patient relationship and the administrator is interpreting a contract, not rendering a professional service."

Stephanie Kanwit, chief counsel for the American Association of Health Plans, said the appeals court was "relying incorrectly" on language in an important Supreme Court ruling and was "rewriting Supreme Court precedent."

Peter Jacobson, an expert on health law at the University of Michigan, said the Supreme Court might revisit the managed care issues. "For now, it looks like the trend is toward greater permissiveness" for suits against H.M.O.'s in state courts, he said.

Representatives for employers said the ruling was worrisome. Helen Darling, president of the Washington Business Group on Health, a group of large employers, said, "Anything that forces employers to cover things they don't intend to cover makes it both more costly and more risky."

Laurel Pickering, president of the New York Business Group on Health, said employers would not like to see "an increasing number of lawsuits."

Mark Ugoretz, president of the Erisa Industry Committee, a national group of large employers, said that lawsuits were adding to costs. "We are fast approaching a point where people cannot afford insurance," he said.