In a victory for patients whose health plans refuse to honor their doctors’ recommendations,1 the U.S. Supreme Court has upheld an Illinois law mandating external review of disputes between primary care physicians and health maintenance organizations, or HMOs, about the medical necessity of proposed treatment. The court concluded that the Illinois statute, which is similar to laws in about 40 other states, was not pre-empted by the federal Employee Retirement Income Security Act, or ERISA, of 1974.
The Supreme Court’s 5-4 holding resolves a conflict between two U.S. Courts of Appeal.2 The ruling upholds a decision from the U.S. Court of Appeals for the 7th Circuit. However, the Supreme Court overturned a ruling from the U.S. Court of Appeals for the 5th Circuit that a similar Texas law was preempted by ERISA.
This opinion is the latest in a series of Supreme Court decisions in which the court has given more weight to a "commonsense" analysis to determine whether a state statute regulates insurance.
The case before the Supreme Court involved a dispute between Rush Prudential HMO, Inc., and Debra Moran, a patient who was covered by a medical benefits plan sponsored by her husband’s employer. Rush Prudential HMO contracted to provide services under this plan, which was governed by ERISA.
In 1997, Ms. Moran’s primary care physician recommended that Rush approve an operation for Ms. Moran that would be performed by a surgeon who was unaffiliated with the HMO. Ms. Moran was experiencing pain and numbness in her right shoulder, and treatments attempted by her primary care physician had been unsuccessful. However, Rush concluded that the operation by the out-of-network surgeon was not "medically necessary."
In January 1998, Ms. Moran requested an independent medical review of the denied claim, as required by the Illinois HMO Act. The act stated that in disputes between a primary care physician and an HMO about the medical necessity of a covered service, an independent physician must review the proposed treatment. If the reviewing physician decides that the treatment is medically necessary, the HMO must cover the service. When Rush failed to provide the independent review, Ms. Moran sued in state court to force Rush to comply with the Illinois HMO Act. Rush removed the case to the federal court, arguing that her lawsuit was preempted by ERISA.
While the suit was pending, Ms. Moran underwent the operation performed by the out-of-network surgeon, at her own expense. She submitted a $94,841.27 reimbursement claim to Rush, which consulted three doctors who concluded that the surgery was medically unnecessary.
Meanwhile, the federal court sent Ms. Moran’s lawsuit back to a state trial court, which ordered Rush to submit to a review by an independent physician. That physician concluded that Ms. Moran’s surgery had been medically necessary. Ms. Moran amended her lawsuit to seek reimbursement for the surgery as medically necessary under the terms of the Illinois HMO Act, and Rush once again had the case sent back to federal court, arguing that Ms. Moran’s lawsuit stated a claim for ERISA benefits and thus was completely pre-empted by ERISA’s civil enforcement provisions. The federal district court denied the claim on the grounds that ERISA pre-empted the Illinois law. Ms. Moran appealed to the U.S. Court of Appeals for the 7th Circuit, which reversed the federal district court’s holding. Rush then appealed to the Supreme Court.
The key issue before the Supreme Court was whether the independent review requirement in the Illinois HMO Act was preempted by ERISA. The ERISA pre-emption statute states that this federal law will pre-empt state laws relating to employee benefit plans. However, there are several exceptions, one of which is a provision that ERISA will not pre-empt state laws regulating insurance.
It was clear to the court that the provision of the Illinois HMO Act at issue related to an employee benefit plan. Thus, the court proceeded to consider whether the Illinois law was saved from pre-emption because it regulated insurance. The court first used a "commonsense" analysis to determine whether the law was specifically directed toward the insurance industry, and considered whether the statute related to the spreading and underwriting of a policyholder’s risk.
Rush argued that an HMO should be seen as a health care provider, and that regulation of an HMO consequently should not be viewed as regulation of an insurer. But the court stated that an HMO acts both as a health care provider and as an insurer, and that there was no reason why an insurance law saved from pre-emption could not also apply to health care providers.
The court also observed that HMOs, along with preferred provider organizations and health insurers with "managed care overlays," combine elements of being an insurer with elements of being a health care provider. "Rush cannot checkmate common sense by trying to submerge HMOs’ insurance features beneath an exclusive characterization of HMOs as providers of health care," the court noted.1
The court also rejected Rush’s arguments that some of the entities regulated by the Illinois HMO Act did not provide insurance, because they passed on some risk to the providers of health care services, or contracted with third-party insurers to protect themselves against large claims. The court found that obtaining reinsurance did not take a primary insurer out of the insurance business.
Similarly, the court did not look favorably on Rush’s theory that the Illinois law did not regulate insurance because it would apply to an HMO that merely acted as an administrator for self-funded plans. It was not clear that the Illinois statute at issue would apply under those circumstances, the court theorized, since the requirement that the HMO "provide" the proposed covered service if the independent reviewer found it medically necessary seems to assume that the HMO in question is a provider, not merely an administrator. The court concluded that there was no reason to think that Congress would have intended for a law regulating insurance to be preempted by ERISA solely because the law had a minimal application to noninsurers.
Furthermore, the court stated that in passing the HMO Act of 1973, which established and defined the phrase "health maintenance organization," Congress mandated that the HMOs governed by this act would bear and manage risk. The court also noted that the Illinois law defines HMOs to include organizations that bear risk associated with the delivery of health care services. In addition, the court observed that HMOs have taken over much business formerly performed by traditional indemnity insurers, and that they are almost universally regulated as insurers under state law. Thus, the court concluded from its "commonsense" analysis that the Illinois HMO Act was directed toward the insurance industry and regulated insurance.
The court went on to consider another test that it traditionally has used to determine whether a state law regulates insurance. This test includes three factors:
- – whether the law pertains to the transfer or spreading of a policyholder’s risk;
- – whether the law governs an integral part of the policy relationship between the insurer and the insured;
- – whether the law targets a practice limited to entities within the insurance industry.
The court noted that all three criteria did not have to be met for a law to be found to regulate insurance, and did not resolve the question of whether the law pertains to a practice that spreads a policyholder’s risk. However, the court found it was clear that the independent review requirement regulated an integral part of the relationship between the insurer and the insured, in that it gives the insured a legal right to obtain a determination of an HMO’s obligation to provide a particular covered service. Moreover, the law is aimed at a practice limited to entities within the insurance industry, the court found, noting that it had addressed the reasons for this conclusion in its "common-sense" analysis, discussed above.
Nevertheless, Rush also had argued that Congress’ intent for ERISA to supersede state law was so clear that, under these circumstances, it should override the statute that saved state insurance laws from preemption. The court observed that in an earlier case, it had opined that a state insurance law would be pre-empted if it created a legal remedy for a participant in an employee benefit plan that was unavailable through ERISA. Rush maintained that the Illinois law had created an "alternative remedy," similar to arbitration, for aggrieved insureds that was unavailable under ERISA. However, the court concluded that while the Illinois independent review law may settle a particular claim for benefits, it offered no remedy other than what was available under ERISA, which permits an insured to sue to obtain benefits covered under an employee benefit plan.
Likewise, the court reasoned, the Illinois act did not give the independent reviewer unlimited discretion to construe terms of the applicable contract or policy. Rather, the independent reviewer was authorized only to consider the issue of medical necessity as it applied to services covered under the contract or policy. The court noted that it had observed in its opinion in a prior case that when an HMO promises to provide medically necessary services, coverage determinations cannot be separated from physicians’ judgments about appropriate treatment. The court concluded that "any lingering doubt" about whether it is reasonable for the Illinois independent review law to provide a mechanism for enforcing an insured’s rights under ERISA "may be put to rest by recalling that regulating insurance tied to what is medically necessary is probably inseparable from enforcing the quintessentially state-law standards of reasonable medical care."1
This decision clearly establishes that states are free to enforce independent review laws that are similar to the Illinois statute. The court did observe in a footnote that if a state adopted an independent review law that included elaborate procedures and placed onerous burdens on the parties, such a law might be pre-empted by ERISA’s civil enforcement provision. However, this decision may increase states’ willingness to adopt and enforce insurance laws that have an impact on employee benefit plans, so long as the laws do not create new remedies for patients that are unavailable under ERISA.
It is important to note that this opinion is the latest in a series of Supreme Court decisions in which the court has moved away from finding that nearly every state law that relates to employee benefit plans is pre-empted by ERISA, to giving more weight to a "common-sense" analysis to determine whether a state statute regulates insurance and thus should be saved from preemption. Moreover, dentists should keep in mind that this decision effectively enacts one of the proposals in the patients’ bill of rights legislation, which presently is stalled in Congress. Thus, the independent review mechanisms debated by Congress may be implemented through existing laws and new legislation in the states.
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