There has been much confusion surrounding the ability of the fifty states to regulate health benefits provided by employers to their employees. During the past year, however, the U.S. Supreme Court took a significant step toward clearing up some of that confusion.
In June, the Court ruled that an Illinois law requiring HMOs to abide by an independent reviewer's decision on medical necessity is not preempted by the federal law that governs employee benefit plans. The Illinois law was, therefore, declared valid.
More specifically, the case, Rush Prudential HMO, Inc. v. Moran, clarified the factors that must be considered in determining whether a state independent review law may be applied to an insured employee health plan.
Debra Moran was covered by her husband's group health plan, which was provided through his employer. Rush Prudential HMO was the service provider to the plan, and the plan was governed by the Employee Retirement Income Security Act (ERISA).
Moran experienced numbness and pain in her shoulder that was diagnosed as thoracic outlet syndrome, and after conservative treatment was not effective, her HMO primary care physician recommended surgery by an out-of-plan specialist who had developed an unconventional treatment. (The treatment consisted of the standard surgery for the condition, plus microneurolysis of the brachial plexus.)
The HMO contract specifically provided that only medically necessary treatment was covered and, in general, only if provided by a physician affiliated with the HMO. Treatment by an unaffiliated physician would be covered only if the services were authorized by both the primary care physician and the HMO's medical director. The HMO repeatedly refused to authorize the treatment, and finally Moran had the surgery without authorization from the HMO.
The Illinois HMO Act provides that, if a primary care physician and an HMO disagree regarding the medical necessity of a covered service proposed by the primary care physician, the HMO must submit the dispute to review by an unaffiliated physician selected jointly by the patient, the primary care physician, and the HMO. At Moran's request, a state court ordered the HMO to submit the dispute to an independent reviewer.
The reviewer determined that the treatment was medically necessary, based on the definition of medical necessity in the HMO contract and on his own judgment. However, the HMO's medical director again determined that the surgery was not medically necessary, and the HMO refused to pay for the surgery, claiming that it was not bound by the independent review because this aspect of the Illinois HMO Act was preempted by ERISA.
B. The Supreme Court's Analysis
Under ERISA, any state law that "relates to" an employee benefit plan is preempted, meaning that such state law may not be enforced with respect to that plan. However, the preemption provision also includes an exception (referred to as the "savings clause") for state laws that regulate insurance, meaning that laws regulating insurance may be validly enforced even if they relate to an employee benefit plan.
Nevertheless, even if a state law is protected from preemption by the savings clause, it will not be enforceable against an employee benefit plan if the state law offers a remedy that ERISA would not otherwise provide.
The Supreme Court had no difficulty finding that, while the Illinois HMO Act related to an employee benefit plan, the Illinois statute was, nevertheless, "saved" from preemption because the state law regulated insurance. The Court then examined the remedies provided by the Illinois HMO Act, and found that the law did not create any cause of action or any form of relief other than as provided by ERISA.
According to the Court, although the procedure required by the Illinois law has some resemblance to arbitration, "the proceeding . . . has a different character . . . not at all at odds with the policy behind [the ERISA provisions]. The [Illinois law] does not give the independent reviewer a free-ranging power to construe contract terms, but instead, confines review to a single term: the phrase medical necessity[.]"
The court determined that, notwithstanding its binding effect, the independent review required by the Illinois HMO Act "does not resemble either contract interpretation or evidentiary litigation before a neutral arbiter, as much as it looks like a practice (having nothing to do with arbitration) of obtaining another medical opinion."
The Court was also careful to emphasize that under the Illinois law, the independent reviewer was limited to consideration of what is medically necessary, a decision that it characterized as "heavily imbued with expert medical judgments." The Court noted that its decision did not imply that states could require independent review of other terms of insurance contracts.
Many states, including Maryland, have laws requiring health insurers to submit disputes to external reviewers. Before the decision in Rush Prudential, the enforceability of those statutes in relation to employee benefit plans was open to question.
Now, there is some guidance that can be used to determine whether a particular external review statute is enforceable or is preempted by ERISA. In fact, Maryland's highest appellate court, in Connecticut General v. Insurance Commissioner, recently relied on Rush Prudential to validate a Maryland law that permits the review of HMO coverage decisions by the Maryland Insurance Commissioner.
In broad strokes, the Rush Prudential guidance can be summarized by the following questions:
1. What is the nature of the external review? Is it more like obtaining a second opinion (which is permitted) or more like arbitration (which is not permitted)?
2. Does the state law create new rights or remedies for the insured that are not provided by ERISA? (If it creates new rights or remedies, it is probably preempted.)
3. Does the state law apply only to insurers (so that it is permitted under the savings clause), or does it also apply to self-funded employee benefit plans (which may not be deemed to be in the business of insurance)?
4. What is the subject matter of the external review? Is it a determination of what is medically necessary, or some other issue that requires the application of expert medical judgment (which is permitted), or is it something else (which is still an open question)?