The law at issue prohibits health insurers in Kentucky from refusing to accept any provider who is willing to meet the terms established by the insurer for participation. Several health maintenance organizations, or HMOs, and a Kentucky-based association of HMOs challenged the law. These groups argued that the Kentucky law was pre-empted by ERISA because that federal law states that it will supersede state laws relating to employee benefit plans. However, the ERISA preemption statute also contains a "savings clause," which provides that state laws that regulate insurance will not be pre-empted.

The U.S. District Court that initially heard the case concluded that the any-willing-provider law regulated insurance and was thus saved from preemption. The U.S. Court of Appeals for the Sixth Circuit agreed with the district court,² and the HMOs appealed to the U.S. Supreme Court.

For the Supreme Court, the first step in its analysis of the case was to consider whether the Kentucky any-willing-provider law regulates insurance. The high court noted that the law would have to be specifically directed toward the insurance industry—and not be a law with only an incidental affect on the insurance industry. The court also noted that in order to be saved from pre-emption, the state law must regulate insurance, not insurers. Another way of saying this is that the law must regulate insurers with respect to their insurance practices, the court added.

The Supreme Court rejected the HMOs’ argument that the Kentucky law was not specifically directed toward the insurance industry since it also affects physicians who seek to contract with HMOs. The court noted that the any-willing-provider statutes did not impose any requirements on health care providers. The high court also observed that it had previously held that other laws—such as an Illinois statute requiring HMOs to provide independent review of certain disputes over whether services are medically necessary—were directed toward the insurance industry, even though those laws affected people or entities other than insurers.³

An additional consequence of the Illinois law, for example, is that it prevents insureds from joining an HMO that would withhold the right to independent review in exchange for a lower premium. Laws directed toward certain entities will almost always prevent other entities from doing, with the regulated entities, what the law prohibits, the court noted. This would not mean that the law was not directed toward the regulated entity’s industry.

The HMOs also argued that the any-willing-provider statutes did not regulate insurers with respect to an insurance practice because they do not control the actual terms of insurance policies. The court disagreed, noting that the any-willing-provider law regulated insurance by imposing conditions on the right to engage in the business of insurance.

As the second part of the new test to determine whether a state law regulates insurance, the court found that the law must substantially affect the risk pooling arrangement between the insurer and the insured in order for the law to be saved from ERISA preemption because it regulates insurance. In this case, the court found that by expanding the number of providers from whom an insured may receive health services, any-willing-provider laws alter the scope of permissible bargains between insurers and insureds in a manner similar to the Illinois independent review law upheld by the court in 2002. The Illinois law in that case mandated external review of disputes between primary care physicians and HMOs over the medical necessity of proposed treatment. The court concluded that ERISA did not preempt the Illinois law.

In this decision, the court rejected a framework for an analysis that it, and consequently lower federal courts, had previously employed in ERISA pre-emption cases. This test had taken into consideration whether certain practices constituted the business of insurance under the McCarran-Ferguson Act, which provides that state laws shall regulate the business of insurance, unless pre-empted by a federal law that specifically relates to the business of insurance.

Three factors were considered under this test:

– whether the practice had the effect of transferring or spreading a policyholder’s risk;

– whether the practice was an integral part of the policy relationship between the insurer and the insured;

– whether the practice is limited to entities within the insurance industry.

Noting that this framework for analysis had failed to provide clear guidance to lower federal courts, the Supreme Court observed in the opinion that the McCarran-Ferguson Act takes into consideration whether certain practices constitute the business of insurance, or whether a state law was enacted for the purpose of regulating the business of insurance. The ERISA savings clause, however, asks only whether the law at issue regulates insurance.

Thus, the court concluded that the following two requirements must be met for a state law to be saved from preemption because it regulates insurance:

– the law must be specifically directed toward entities engaged in insurance;

– the law must substantially affect the risk pooling arrangement between the insurer and the insured.

As noted in a previous article,² three U.S. Courts of Appeal found that state any-willing-provider laws were not preempted by ERISA, while two U.S. Courts of Appeal reached the opposite conclusion. While the terms of the any-willing-provider laws reviewed in each of these cases differed, it is unlikely that insurers and health plans will be able to successfully challenge state any-willing-provider laws in the future on the grounds that those laws should be preempted by ERISA.

Furthermore, the Supreme Court’s new, simpler preemption test described above is likely to result in fewer rulings that ERISA pre-empts state laws that regulate insurance. This decision represents another step in the erosion of the doctrine of ERISA pre-emption, which until recent years provided that any insurer or health plan subject to ERISA would automatically be exempt from most state laws affecting employee benefit plans.

View larger version (118K): [in this window] [in a new window]   Mr. Sfikas is ADA chief counsel and an adjunct professor of law at Loyola University of Chicago School of Law. He has lectured and written on legal issues and is a fellow of the American College of Trial Lawyers. Address reprint requests to Mr. Sfikas at the ADA, 211 E. Chicago Ave., Chicago, Ill. 60611.