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Managed care organizations have suffered another knee-buckling blow in the U.S. Supreme Court in a decision likely to expand state insurance regulation and to hasten, some experts say, major changes in the health insurance industry. Some managed care spokespersons downplayed the decision’s immediate impact. Some health care litigators and experts did not. “The ground is moving and may not need to move much more to change managed care as we know it,” said Elliott B. Pollack, co-chairman of the health care section of Pullman & Comley in Hartford, Conn. A unanimous Court rejected the industry’s argument that Kentucky’s “any willing provider” (AWP) statute is pre-empted by the federal Employee Retirement Income Security Act, known as ERISA. Kentucky Association of Health Plans v. Miller, No. 00-1471 (April 2, 2003). Kentucky’s law requires health insurers to open their networks to any health care provider willing to meet the conditions for participation. It defines “health insurer” broadly to include health maintenance organizations, provider-sponsored plans, health delivery networks and self-insured employer-organized plans. Kentucky and six other states include doctors, pharmacies and other providers under their AWP laws. Another 16 states have laws that apply to pharmacies. To the industry, the laws strike at the core of the managed care concept: that the organizations can obtain fee agreements or fee discounts by guaranteeing many patients to a few doctors. The ruling was the industry’s second high court defeat in a year. Last term, the justices ruled that states may require independent review of adverse benefit decisions made by HMOs. Rush Prudential HMO Inc. v. Moran, 122 S. Ct. 2151 (2002). At issue in both cases was the reach of ERISA, enacted in 1974, well before the birth of the managed care industry. ERISA pre-empts state laws that “relate to any employee benefit plan.” An exception permits state laws that regulate “insurance, banking, or securities.” The Court had to decide whether an any-willing-provider law regulates insurance. It said the Kentucky law does. Writing for the Court, Justice Antonin Scalia announced a “clean break” with factors used since 1985 in preemption analysis. He set out a two-part test for determining whether a state law regulates insurance: “First, the state law must be specifically directed toward entities engaged in insurance,” he wrote. “Second, the state law must substantially affect the risk pooling arrangement between the insurer and the insured.” DECISION’S IMPACT The Kentucky decision creates concerns for the industry, said Daly D.E. Temchine of the Washington, D.C., office of New York’s Epstein, Becker & Green, which filed an amicus brief on behalf of the American Association of Health Plans opposing Kentucky’s law. Trading patient volume for discounted rates may no longer be a realistic option. Although state laws vary, he said, they can prohibit an HMO from telling a provider, for example, that it will give it an exclusive arrangement in return for a substantial fee discount, and that it has 10,000 members in the provider’s area. “A hospital might say that’s worth a good discount,” Temchine said. “But if you know two competing hospitals in the same service area will say, ‘I’ll take your terms,’ and they have to go into the network, all of a sudden, you’re down to 3,000 members and it’s not as attractive.” Temchine, Pollack and other experts said that the Court’s break from the so-called McCarren-Ferguson guideposts to determine whether a state law regulates insurance was potentially far-reaching. “By disengaging the analysis from the McCarren-Ferguson factors, you’re creating a new definition of insurance, and that potentially could be a big deal,” said Lawrence Lorber of New York’s Proskauer Rose. “It certainly arguably broadens the insurance safe harbor exclusion from ERISA pre-emption.” ERISA experts said employer self-funded plans, long thought to be protected from state regulation, may be open to it. “And what does this do to state patient bill of rights laws which would govern all health insurance?” Lorber asked. The decision will let states regulate more broadly in the insurance area, said Elizabeth A. Johnson, winning counsel and an attorney in the Kentucky Department of Insurance. “I think the Court was trying to stave off more litigation in this area by making a clearer test,” she said. “People won’t be saying every time they don’t like a law that it’s pre-empted by ERISA. “There’s a much higher hurdle now, and that is only to the advantage of state insurance departments.” Pollack predicted that the Rush Prudential and Kentucky cases will be seen as marking the end of the era of managed care “as we know it.” Now, if any willing, competent provider may join any managed care panel, he said, “It appears to me that managed care is going to look more like the old indemnity formulation we were used to until the late ’80s and early ’90s. That is very portentous.”

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